EconoFACTS

March 08, 2023 | 10:44

BoC Decision: Right Down the Middle of the Plate

Economist

Douglas Porter , CFA

Chief Economist and Managing Director
Economics

Douglas Porter has over 30 years of experience ana... (Read more)

Douglas Porter , CFA

Chief Economist and Managing Director
Economics

Douglas Porter has over 30 years of experience ana... (Read more)

The Bank of Canada held interest rates steady today at 4.5%, as universally expected, and the accompanying language was relatively even-handed as the data "have evolved broadly in line" with their views. Still, the Bank maintains a bias to tighten further, if need be.

The Statement was mostly factual, highlighting the Q4 GDP downside miss, but noting that the softness was largely due to inventories. The blowout January jobs result reinforced the point that the labour market "remains very tight", while wage growth is in the 4%-to-5% zone. Still, the BoC expects slow growth to dampen wage and inflation pressures over the coming quarters.

"Overall, the latest data remains in line with the Bank’s expectation that CPI inflation will come down to around 3% in the middle of this year." But they want to see the short-term metrics continue to decelerate—"will need to come down further...to return to the 2% target". No debate there.

The final paragraph of the Statement does potentially open the door a bit wider for hikes to resume, if necessary, and arguably softens the pause rhetoric. In January, the BoC said it "expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases". The explicit reference to holding steady was removed this time, with the phrase changed to "Governing Council will continue to assess economic developments and the impact of past interest rate increases, and is prepared to increase the policy rate further if needed to return inflation to the 2% target." The latter part repeats the January language. Perhaps this is over-interpreting, as the move to pause was noted earlier in the paragraph, but the language is a bit less definitive on pledging to pause this time.

Bottom Line: On balance, there isn't much new information here on the BoC's assessment of the economy. However, perhaps the key takeaway is that the Bank seems to have subtly loosened any commitment to stay on pause, as the forward-looking language simply refers to the need to continue to "assess economic developments". Clearly, the Bank wants to keep its options open if inflation doesn't go their way and/or if the job market continues to sizzle. Of course, the much more hawkish message from the Fed, and the related drop in the Canadian dollar, has heightened the need for optionality. The BoC will now be data dependent, and if the recent strong momentum persists, look for the tone to toughen in the coming weeks.