EconoFACTS

February 07, 2024 | 14:14

BoC Summary of Deliberations (Jan. 24) — Watching and Waiting

Economist

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

The summary of the Bank of Canada’s deliberations from the January 24th decision was set against the BoC dropping its tightening bias. The Bank believes that policy is tight enough, but hasn’t been so for long enough yet given still-nagging inflation pressure. As such, “it was difficult to foresee when it would be appropriate to begin cutting interest rates”. Rate cuts are not imminent.

On economic growth, the Bank continues to see past rate hikes filtering through to weigh on activity. Recall that the January Monetary Policy Report pegged 2023Q4 growth at zero; and 2024Q1 at 0.5% annualized. We’ve since seen some upside data flow, particularly for real GDP, but our updated outlook is not out of line with what the Bank was seeing in January. For the record, we have 1.0% growth in 2023Q4 and are in-line with the MPR at 0.5% for 2024Q1. In general, the Bank believes the economy is operating in “modest excess supply”.

On inflation, the backdrop gets tougher with core inflation metrics still running too strong to allow for rate cuts. As we read in the January press statement, and have heard various times since then, “Governing Council wants to see further and sustained easing in core inflation”. In other words, cooler inflation and more time. That’s a bit of a different picture than the Fed is painting: it believes inflation over the past six months has been where it wants it, but the central bank also wants more time.

Wage growth was noted as a concern by the BoC, especially when set against weak productivity growth. If wages gains don't slow or productivity doesn’t improve, that could be a source of ongoing upward pressure on inflation that is concerning.

The Governing Council also discussed shelter costs, and the risk that “if the housing market rebounded more than expected in the spring of 2024, shelter inflation could keep CPI inflation materially above the target even while price pressures in other parts of the economy abated”. While mortgage interest costs are the big driver of inflation right now (from past rate hikes), and rents are also a large contributor (where monetary policy doesn’t have a big immediate effect), there’s some acknowledgement that easing too soon and re-igniting the resale market would be a misstep. After all, resale price swings find their way into the CPI relatively quickly, and the current weight of the categories they directly influence is now higher than each of rent and mortgage costs.

Given those moving parts, the BoC is also focusing on the breadth of inflation. It says that “prices for just over half of CPI components were growing at a rate above 3%, indicating that the drivers of too-high inflation continued to be broad-based.”

Bottom Line: The Bank of Canada is not cutting rates yet. It needs to see inflation metrics improve further and show that they can sustain themselves at better levels.