Thoughts

April 10, 2023 | 06:50

Bank of Canada Preview: Patience Paying Off

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 is expected to hold policy rates steady at 4.5% for a second consecutive meeting, following its year-long tightening cycle. The pause was driven by policymakers’ desire to take time to evaluate the impact of the most aggressive rate hike campaign in a generation, consistent with the old saying that monetary policy has long and variable lags. The recent data have been mixed, with January absolutely off-the-charts strong, while it looks as though February held in better than expected. However, the Bank’s Business Outlook Survey was exactly what policymakers want to see: a relatively modest slowdown, easing capacity and labour pressures, and slowing inflation expectations.

The policy statement will likely be relatively straightforward. The economy has performed better than expected so far in 2023, but some deceleration to below-potential growth remains the base case. The view on the U.S. is one area where we anticipate much more caution, due to the flare-up of banking sector stress. It’s only been a few weeks since peak fear, so there’s plenty of uncertainty about the impact. The few data points in hand have held up, but the Bank will exercise caution here as conditions could still deteriorate further. On inflation, the progress will be noted, along with the fact that base effects will be very favourable over the coming months. However, that will be followed by the fact headline and core inflation remain well above the 2% target, and the BoC will not tolerate that.

This decision will be accompanied by a Monetary Policy Report. The growth forecasts are due for some meaningful revisions, as the BoC had just +0.5% a.r. for Q1 GDP growth, whereas BMO is up to +2.5%. Look for the BoC to be in the 2%-to-2.5% range, though that will be largely offset by Q4 coming in flat versus its 1.3% forecast. In the January MPR, the BoC stated that economic growth was “to stall through the middle of 2023”. That broader narrative is expected to be repeated with Q2 GDP growth likely to be introduced around flat. That would keep 2023 annual growth near 1%. The forecast profile for headline inflation is poised to be downgraded modestly. The Bank pegged Q1 CPI at 5.4% y/y, which looks to be trimmed a tick or two. That could mean a bit of downside for 2023Q4’s 2.6% forecast; but prudence, given unpredictable events like the recent OPEC+ production cut, suggests it could be unchanged.

The April MPR features the Bank’s annual assessment on potential growth. Since last year, potential growth estimates have seen a wider range, from 1 ppt wide to around 2 ppts for 2023 and 2024. We’ll be watching the labour force aspect of the estimate after population growth surged in 2022. Unfortunately, productivity growth remains dismal, so some downgrade there will provide an offset. Any changes in productivity will loom large for how quickly excess demand can be unwound. Indeed, an upgrade could lay the initial groundwork for earlier-than-anticipated rate cuts. For now, we continue to expect the BoC will be on hold through 2023, with rate cuts starting in early 2024.