Thoughts

December 01, 2023 | 15:14

BoC Preview: Steady End to a Volatile Year

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 final policy announcement of 2023 is expected to be uneventful with rates holding at 5% for a third consecutive meeting. Market speculation has shifted over the past couple of months from the potential for more hikes to the timing of rate cuts in 2024. Markets are pricing non-trivial odds of a rate cut as soon as March, even though the BoC has provided exactly zero hints of a shift just yet. We don’t expect a material change in tone at the December meeting either: mild hawkishness highlighting that inflation remains well above target.

Since the October meeting and MPR, Canadian economic performance has been mixed, with the latest figures providing plenty of intrigue due to the huge revisions. Q3 GDP came in well below the BoC’s forecast, but Q2 was revised up massively, and there were upward revisions to 2021 and 2022. The details of the Q3 contraction also weren’t as bad as feared, as inventories and trade weighed heavily, though government spending was a big positive. The BoC’s Q4 forecast for +0.8% growth seemed optimistic initially, but with September GDP at +0.1% and October’s flash estimate a tick better, it looks achievable now (though the big drop in hours worked in November points to softness ahead). All told, the growth figures over the past few weeks don’t materially alter the picture for policymakers. The economy continues to struggle under the weight of higher interest rates, but has thus far avoided recession on aggregate (the per capita numbers paint a much bleaker picture).

With the economy hanging in for now, the BoC can remain squarely focused on inflation. There’s been some progress on this front, with the October figures calming nicely. While the Bank’s core CPI metrics have ticked lower, they remain well above the 2% target by any measure. That will likely prompt the policy statement to maintain a mildly hawkish tilt. Even though the soft economic backdrop points to further disinflationary pressure ahead, policymakers likely want to continue pushing back on inflation expectations after missing the 2% target for most of the past three years. Maintaining (or regaining) credibility is key for the BoC, and that is expected to keep them talking tough on inflation until most everyone is convinced inflation is durably headed back to target.

Key Takeaway: No December drama is anticipated from the Bank of Canada, with policy rates expected to stay at 5%. While markets will be looking for any hints of rate cuts, policymakers aren’t likely to provide any with inflation still well above target. That will likely change as we make our way through 2024 and inflation continues to slow, but we’re not there quite yet.