Bank of Canada Preview for June 7: Maintaining a Tightening Bias
The Bank of Canada meets On June 7 and will be doing so with Canadian economic data generally exceeding expectations. A tightening at this meeting, which will not contain a quarterly Monetary Policy Report, looks unlikely, but the strength of data will be noted and a tightening bias maintained. The BoC will leave the option of tightening on July 12 open, while easing is unlikely to be considered this year.
The policy rate currently stands at 4.5%, with the last two meetings, on March 8 and April 12, having seen rates left unchanged. Since the April 12 meeting Canadian CPI slipped from 5.2% in February to 4.3% in March, but unexpectedly corrected higher to 4.4% in April. The core rates did however continue to fall in both months, and after the April data BoC Governor Tiff Macklem stated that inflation was coming down in line with BoC forecasts. Strong year ago data will drop out in the May and June data, and should take headline CPI below 3.0% in June, but the BoC has stated getting it back to the 2% target will be harder. The BoC’s core rates are still running above 4.0% and monthly ex food and energy data (not one of the BoC’s core rates but a useful guide to current trend) has seen 0.3% seasonally adjusted gains in most recent months.
Q1 Canadian GDP rose by 3.1% annualized, above a 2.3% forecast made by the BoC in April. The beat was not dramatic, but the details showed gains in consumption, investment outside housing and exports. Domestic demand rose by a four-quarter high of 2.6% while GDP grew by a strong 5.4% excluding slowing inventory growth. A preliminary estimate for April for a 0.2% monthly increase suggests the BoC’s April estimate that Q2 will see a 1.0% annualized increase may also prove too low. Employment growth has remained strong through April with the unemployment rate of 5.0% only marginally above its mid-2022 low of 4.9%.
In its April statement the BoC stated that they continued to assess whether policy was sufficiently restrictive to relieve inflationary pressures and that they were prepared tighten further if needed. There is probably no need to change that language though the BoC will want to make it clear that tightening will be debated if data continues to show strength before its next meeting on July 12, when the next Monetary Policy Report will be delivered. We currently project the BoC to keep rates on hold for the remainder of the year, though policy will be data-dependent. BoC speakers have made it clear that it is too soon to consider easing, and that will remain the case.