September 20, 2023 | 13:48
BoC Summary of Deliberations — Finger Still On the Hike Button
The summary of the Bank of Canada’s deliberations from the September 6th meeting reiterated a hawkish bias. Recall that meeting saw the Bank pause after two consecutive 25 rate hikes, leaving the policy rate at 5%, or the highest since March 2001.
In a nutshell, the Bank saw evidence that excess demand is easing, as shown by a weaker-than-expected Q2 real GDP report, slowing credit growth, and softer consumer spending and housing activity. These are all signs that past tightening of monetary policy is working, and the Bank is still allowing for the full impact of those moves to filter through the economy. That said, some one-off factors such as wildfires and labour strikes are estimated to have temporarily cut Q2 growth by 0.5 ppts and 0.25 ppts, respectively. And, the Bank is eyeing some softening around the edges of the labour market, which has yet to translate into softer wage growth. Indeed, "members still view annual wage increases in the current range as inconsistent with achieving price stability without a large increase in productivity".
Meantime, inflation is still not cooperating, hence the clear message in the September statement that the Bank “is prepared to increase the policy interest rate further if needed”. That’s a message reiterated by Deputy Governor Kozicki yesterday as well. Indeed, as of the September meeting, "the lack of progress in underlying inflation remained a significant concern".
Of course, we’ve seen the August inflation report since that meeting, and the results were really not helpful. At all. Headline inflation picked up to 4.0% y/y from 3.3% y/y in July. The Bank had forecasted 3.3% y/y for all of Q3 in the July MPR, so this is already offside with further upside likely in September as well. While gas prices are hurting right now, underlying core inflation measures are not cooperating either. Over the latest three months, the median (+4.4% a.r.), trim (+4.6% a.r.), ex-food & energy (+3.6% a.r.) have all accelerated. And, even the CPIX (which strips out both gas and mortgage interest costs, among other volatile items) has picked up to a 3.2% annualzied clip. Suffice it to say that if the Bank was still concerned about inflation at the September meeting while pausing, the incoming data have confirmed those worries.
The Bottom Line: The Bank of Canada is trying to thread the needle between decelerating economic activity, the impact of past rate hikes still working through the economy, but stubbornly persistent above-target core inflation. Rates either aren't high enough yet; or they are high enough, but haven't been so for long enough. It's telling that, at this meeting, the Bank "did not want to raise expectations of a near-term reduction in interest rates, given that they only considered keeping the policy rate where it is or raising it further." The bias remains to tighten further if wages and inflation don't cooperate...