EconoFACTS

January 15, 2024 | 11:23

BoC BOS and SCE (Q4) — Stubborn Sticky Inflation

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's Business Outlook Survey (BOS) for Q4 was a mixed bag. The headline BOS indicator improved 0.3 pts to -3.15, but remains historically weak. Despite the better headline, the BOS write up opens with "Firms report less favourable business conditions", as uncertainty is the top worry. The next section notes that "fewer firms plan unusually large price increases", which is something the BoC has been keenly watching for. Sales expectations remain muted, employment expectations hit an eight-year low, though investment intentions improved to the longer-term average. Capacity pressures were little changed (back in line with the long-term median), while labour shortages dipped again to a more than two-year low. Price pressures are expected to ease further (though less than in Q3), while inflation expectations were stubbornly sticky. The overriding message from the BOS was that the economy remains soft, and price pressure will likely continue to ease, but there's still work to be done on inflation expectations.

Released at the same time, the Canadian Survey of Consumer Expectations showed that inflation expectations dipped ever so slightly, but remain quite elevated on a one and two-year horizon, while five-year expectations are heading toward 2% and at multi-year lows. Wage expectations pulled back somewhat as well, while high inflation and interest rates continue to drive consumers to reduce spending.

Key Takeaway: The BoC surveys paint a mixed picture, with activity remaining soft overall, but some very tentative potential signs that we could be nearing a bottoming. However, inflation expectations remain stubbornly high, declining only ever so slightly. While the direction is encouraging, and will likely continue to be as the economy remains weak, we'll need to see inflation expectations move down further before policymakers are willing to cut rates.

Table 1 - Bank of Canada — Business Outlook Survey

(balance of opinion : greater minus lesser : %)

Source: BMO Economics, Haver Analytics, Bank of Canada