EconoFACTS

January 25, 2023 | 10:52

BoC Policy Announcement and Monetary Policy Report — Pause for Effect

Economist

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

Benjamin Reitzes

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

The Bank of Canada hiked rates 25 bps to 4.50% as expected. The statement signalled that policymakers are happy with where rates are at the moment, and if the economy/inflation evolve as expected, the tightening cycle will pause here. However, they also clearly note that they're prepared to do more if necessary.

Here's the quote: "If economic developments evolve broadly in line with the MPR outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases. Governing Council is prepared to increase the policy rate further if needed to return inflation to the 2% target..." (emphasis is ours)

The commentary on the economy was mixed, highlighting better-than-expected growth momentum, while also stating that "there is growing evidence that restrictive monetary policy is slowing activity." The Bank's GDP growth forecast was revised up 3 ticks for 2022 to 3.6%, driven by historical revisions and a better Q4 outlook (+1.3% vs +0.5%), while 2023Q1 was introduced at +0.5%. The 2023 annual forecast was raised a tick to 1%, while 2024 was trimmed 2 ticks to 1.8%. No big surprises there, and more optimistic than BMO's call.

On inflation, the recent slowing was noted, with headline CPI expected to get down to 3% y/y by mid-year, and 2% in 2024. The 2023Q4 forecast was cut from 2.8% y/y to 2.6%, while 2023Q1 was introduced at 5.4% y/y. BMO's inflation forecast is a bit more cautious, but not too far above the BoC, though the slowing trend depends heavily on energy prices behaving.

Key Takeaway: The Bank delivered 25 bps as expected, and is once again leading the way among global central banks as it's the first to signal a pause. The shift was a bit more dovish than anticipated, driving Government of Canada bond yields lower and putting the Canadian dollar on the defensive. While policymakers haven't shut the door on more hikes, the bar for further tightening is quite high. It looks like a March move is off the table barring some wild data. The April policy decision will be more definitive as we'll have a few employment and CPI reports by then. BMO's base case remains that the BoC is on hold through the rest of 2023.

Now we wait for Governor Macklem's press conference at 11am.