EconoFACTS

January 24, 2024 | 10:25

Bank of Canada Rate Decision & MPR — Patiently Waiting

Economist

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal nearly two decades. He is re-sponsible for the Canadian macro-econom... (Read more)

Benjamin Reitzes

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal nearly two decades. He is re-sponsible for the Canadian macro-econom... (Read more)

The Bank of Canada held policy rates steady at 5% for the fourth consecutive meeting, as widely expected. The tone of the statement was generally cautious about the economic outlook, but continued to signal concern about the stickiness of core inflation. Notably, the BoC also continues with quantitative tightening (QT) or balance sheet normalization, despite some chatter in the lead up that we could see some changes there.

The statement dropped the phrase that the BoC "remains prepared to raise the policy rate further if needed", providing a clear signal that rate hikes are done. However, it's questionable whether anyone really took that threat as credible given the persistent domestic economic weakness. That being said, Governor Macklem's opening statement for the press conference states, "That doesn’t mean we have ruled out further policy rate increases"...if inflation perks back up. He goes on to note that if the economy evolves as expected, "I expect future discussions will be about how long we maintain the policy rate at 5%."

The global growth outlook was revised up a touch for each of the next two years, but still looks to slow in 2024. The U.S. is the bright spot seeing a big upward revision in 2024 (now in line with BMO's call), while the rest of the world was little changed. The Canadian GDP growth forecast was trimmed 1-to-2 ticks for each of 2023, 2024, and 2025. The near-term forecasts were also cut, with 2023Q4 growth now at 0% (from +0.8%) and Q1 is +0.5%, not too far from our call for flat in both quarters. The inflation forecasts were little changed from the October MPR, with only 2024Q4 a tick lower at 2.4% y/y.

Perhaps the most important part of the statement is that the Bank believes that the Canadian economy is now running in excess supply. That should be encouraging for policymakers as it drives disinflationary pressure. However, we're not there yet, and inflation remains a concern given "the persistence in underlying inflation." Indeed, near the beginning of Governor Macklem's opening statement he says that "We need to give these higher rates time to do their work." And, toward the end, reiterates with "Monetary policy is working, and we need to continue to let it work."

Key Takeaway: The rapid and sizeable rate hikes over the past two years are doing their job, but it looks like we'll be at 5% for a while yet as the BoC wants to see a further slowing in inflation. BMO's call for a June start to rate cuts looks perfectly reasonable at the moment.