EconoFACTS

June 21, 2023 | 14:14

BoC Summary of Deliberations (June 7) — A Close Call

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 Summary of Deliberations from the Bank of Canada's June 7 meeting outlined the rationale for the 25 bp hike. Similar to the statement, the resilient economic backdrop was highlighted with strength in interest rate sensitive sectors persisting. Policymakers paid particular attention to what drove consumer spending. A few potential drivers were noted: 1) the lagged effect of past rate hikes; 2) pent-up demand; 3) excess savings and a tight labour market; 4) population growth and seasonality. Most of those factors suggest that tighter policy was still needed. Given solid economic momentum, the BOC notes that..."Growth in the second quarter was therefore viewed as likely to be stronger than forecast in the April MPR." The Bank was forecasting Q2 GDP growth of 1%, but they're clearly biased to upgrade that figure. We're sitting around 1% as well, but that could get upgraded if next week's monthly GDP report is solid. The better growth profile means a slower closing of the positive output gap and more inflation pressure, weighing on the side of needing higher rates.

On the inflation front, there was some concern that the headline rate ticked higher in April. Firmer goods prices and rising home prices were noted as well. But the real source of angst appears to be the lack of progress on short-term core inflation metrics. Both the trim and median core CPI measures accelerated on a 3-month annualized basis, and have held in the mid-3% range for the past eight months. In addition, persistent weakness in productivity growth coupled with elevated wage gains were highlighted as inconsistent with 2% inflation.

Key Takeaway: The market went into the June meeting about 50/50 priced for a rate hike, and it was indeed a close call as the Bank debated a hike versus a hold combined with a hike signal. The data convinced them to push rates higher. Looking ahead to the July policy meeting, it's all about the data, with May CPI and the Business Outlook Survey next week, and June jobs the week before the meeting. For now, we continue to look for a hike in July.