Bank of Canada Resumes Tightening, Hawkish Tone Suggests Scope For More
The Bank of Canada has resumed tightening, by 25bps to 4.75%, after pausing in March and April. The tone of the statement is clearly hawkish detailing recent stronger than expected data without dovish caveats. This suggests the BoC may not be done. We now look for one more tightening, most likely in September, and easing not starting until Q2 2024.
In detailing a stronger than expected 3.1% annualized rise in GDP the BoC notes strength in consumption, increasing demand for interest-sensitive goods and a pick-up in housing activity, before going onto note labor market strength and concluding that excess demand looks more persistent than anticipated.
In detailing a pick up in CPI to 4.4% in April, the first rise in 10 months, the statement does not balance this by noting slowing in the core rates, as measured on a y/y basis, In fact it notes 3-month measures of core inflation running in a 3.5-4.5% range, raising concerns that inflation could get stuck materially above the 2% target. The BoC does still expect overall CPI to fall to around 3% in the summer on lower energy prices and year ago strength dropping out.
The BoC justifies tightening by stating that policy was not sufficiently restrictive to bring demand and supply back into balance and adds they will continue to assess the dynamics of core inflation and the CPI outlook. Particular attention will be given to the evolution of excess demand, inflation expectations, wage growth and corporate pricing behavior.
The BoC’s next meeting will be on July 12 when economic projections will be updated. We doubt the BoC will tighten for a second straight meeting but come the subsequent meeting on September 6, the BoC will assess how the economy is evolving relative to its expectations. Without clear signs of progress on core inflation, another tightening could be seen.
We continue to expect 75bps of easing in 2024, by when clear evidence of slowing core inflation should be visible, with moves in Q2, Q3 and Q4. However, with the peak rate now seen at 5.0% rather than 4.5%, we expect 2024 to end with rates at 4.25% rather than 3.75%.