November 08, 2023 | 14:07
BoC Summary of Deliberations — The Waiting Game
The summary of the Bank of Canada’s deliberations from the October 25th meeting highlighted the Bank of Canada's dilemma: Growth in the economy is clearly stalling, but inflation remains sticky, and there is some concern that above-target price gains are becoming entrenched. Against that backdrop, one of the burning questions from the prior meeting was again discussed at this one: Does policy need to tighten further? Or is it tight enough, but just hasn't been so for long enough?
According to the summary, "some members felt that it was more likely than not that the policy rate would need to increase further to return inflation to target". For now though, the bet at the BoC is that they just have to wait longer for 5% policy rates to fully work. And, we would concur that policy is tight enough.
On the growth front, the Bank notes that "the data received since July had shown more clearly that demand was slowing as monetary policy worked its way through the economy". No debate here. Since the October 25th decision, the economic data have remained downbeat. Most notably, StatCan pegged the initial read on September growth as flat, which would now imply seven months of no real GDP growth. And we'll echo again that this looks even worse when considering the population is surging at a 3% clip. Meantime, growth for all of Q3 is initially estimated at right around zero (our current call in for a small +0.2% a.r. increase). The MPR that accompanied this decision penciled in 0.8% growth for Q3, and the same for Q4 (BMO is looking for -1.0% in Q4). All this to say that the BoC wasn't encouraged by the economic growth picture during the October deliberations, and that picture got incrementally worse since decision day.
Meantime, inflation is still not cooperating, and the Bank was actually forced to lift its inflation forecast at this meeting/MPR date. They note that "the lack of downward momentum in underlying inflation was a source of considerable concern." Along those lines, there is some concern building that inflation is becoming entrenched, especially if core inflation trends aren't budging even alongside clear easing of excess demand pressure.
To quote: "As excess demand continues to be absorbed, persistence in core inflation, elevated inflation expectations and wage growth, and atypical corporate pricing behaviour could be indications of high inflation becoming entrenched. In such a scenario, members acknowledged that further monetary policy tightening would likely be required to restore price stability." Translation: If inflation doesn't break when the economy is clearly weakening, then we'll likely have to raise rates again to make sure it does. For the record, we don't think we're there yet.
As an interesting aside, the Bank sent a pretty clear shot out to fiscal policymakers as we head into budget preparation season. That is, "by adding to demand at a faster pace than the growth of supply, government spending could get in the way of returning inflation to target." Translation: You keep spending, and we'll keep raising rates, or at least have to keep them at these high levels.
The Bottom Line: The Bank of Canada is watching growth clearly struggle, but is also nervously watching core inflation trends hold above their target. It's a waiting game now, and it sounds like inflation will either break more convincingly, or the Bank will be willing go back to the rate-hike well. We still think the former plays out.