㽶Ƶֱ

Skip to content

Uzelman: The Bank of Canada 㽶Ƶֱis likely done with rate hikes㽶Ƶֱ

A column by Bruce Uzelman
33950485_web1_20230630100640-4c22b8167c445527f1635789e338ad1dfb23c9bb5ef955f87ef61d783143f99d
The Bank of Canada headquarters is shown in Ottawa, Wednesday, June 1, 2022. THE CANADIAN PRESS/Adrian Wyld

~BW Uzelman

The Bank of Canada held interest rates steady at 5% on September 6. Economists are cautious in their predictions for future rates, but are broadly optimistic.

Rising mortgage rates are impacting increasing numbers of Canadians. But Benjamon Tal, deputy chief economist of CIBC informs that a large number of mortgage and other household debt holders will not be impacted in 2023. His report reads, 㽶ƵֱOut of the total household debt of $2.7 trillion, close to $650 billion (24 per cent) face actual increase in interest payment this year.㽶Ƶֱ These debt holders and others, no doubt, want an answer to two questions: When is the Bank done hiking interest rates? When will they start cutting rates? Back to that in a bit.

Economist Jim Stanford argues that the Bank has only one job 㽶Ƶֱ to control inflation. The Director of the Centre for Future Work, labels it, 㽶Ƶֱthe Bank of Canada㽶Ƶֱs one-dimensional mission㽶Ƶֱ. That is a limited view of its role. The Monetary Policy Framework, an agreement between the Bank and the government, does stress, 㽶Ƶֱthe primary objective of monetary policy is to maintain low, stable inflation over time㽶Ƶֱ, but also notes, 㽶ƵֱMonetary policy should continue to support maximum sustainable employment㽶Ƶֱ.㽶Ƶֱ Stanford㽶Ƶֱs narrow view of the Bank㽶Ƶֱs role appears to stoke his fear that the Bank may well continue to hike rates.

The Bank㽶Ƶֱs economic analysis is much broader than simply examining the headline rate of inflation and its favoured core measures of inflation. It also conducts analyses of the labour market, the strength of the economy (GDP) and much more. Its September 6 press release says, 㽶ƵֱIn particular, we will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving the 2% inflation target.㽶Ƶֱ The Bank examines and interprets trends across the economy before determining appropriate monetary policy.

Unsurprisingly, the Bank leaves considerable doubt as to whether it will raise rates further. The press release notes that the economy has 㽶Ƶֱslowed sharply㽶Ƶֱ in the second quarter, with output contracting by 0.2%, which is necessary to relieve price pressure. The release details weaker consumption growth, reduced housing activity and a lessening of the tightness in the labour market, along with continuing wage growth of 4%-5%. The Bank concludes that excess demand is diminishing. This is largely positive, sustaining the BoC㽶Ƶֱs September decision to hold overnight rate at 5%.

Then comes the bad news, 㽶ƵֱRecent CPI data indicate that inflationary pressures remain broad-based.㽶Ƶֱ Inflation increased to 3.3% in July, and with recent gas price increases, the Bank expects the rate to remain elevated in the near term before reducing course. Causing further concern, the Bank㽶Ƶֱs core measures of inflation remain at 3.5%. Of course, the usual statement of determination follows, 㽶ƵֱThe Bank remains resolute in its commitment to restoring price stability for Canadians.㽶Ƶֱ All in all, it is a mixed message: Excess demand is moderating, but inflationary pressures remain.

The next day, however, the Governor of the BoC, Tiff Macklem, managed to sound more optimistic. He allowed, 㽶ƵֱMonetary policy is working, and inflation is coming down. But we still have some way to go to restore price stability. With past interest rate increases still working their way through the economy, monetary policy may be sufficiently restrictive to restore price stability.㽶Ƶֱ Macklem added that if they have to, they will raise rates again, but they don㽶Ƶֱt want the rate to be higher than necessary.

Many economists think the Bank won㽶Ƶֱt have to raise rates again because excess demand has been wrung out of the economy. Stephen Brown of Capital Economics noted, 㽶ƵֱWith demand quickly shifting from excessive to deficient, and given our expectation that two CPI releases before the Bank㽶Ƶֱs next meeting will show an easing of core inflation pressures, there will be little need for the bank to hike any further.㽶Ƶֱ

Charles St-Arnault of Alberta Central was not so certain. He said further rate increases this year are unlikely, but cannot be ruled out. Douglas Porter of BMO Financials was more confident, 㽶Ƶֱunless growth rebounds in Q3 㽶Ƶֱ which we doubt 㽶Ƶֱ the BoC is likely done with rate hikes.㽶Ƶֱ

Brown, went further, 㽶ƵֱWith recession risks rising and labour market conditions loosening, we continue to think that the bank㽶Ƶֱs next move will be a rate cut, in early 2024.㽶Ƶֱ Brown was amongst the most optimistic of the experts, but cautious optimists predominate.

The BoC㽶Ƶֱs next move may indeed be a cut 㽶Ƶֱ not necessarily in the first quarter of next year 㽶Ƶֱ but plausibly within the first two or three quarters. That said, unequivocal forecasts are a risky undertaking. Economists won㽶Ƶֱt go there, at least not now.

bruce

Bruce W Uzelman

I attended the University of Saskatchewan in Saskatoon.I obtained a Bachelor of Arts, Advanced with majors in Economics and Political Science in 1982.

I have maintained a healthy interest in politics throughout my adult years, and wish to put that and my research skills to work as a political columnist.

Contact: urbangeneral@shaw.ca

Like us on and follow us on .



About the Author: Black Press Media Staff

Read more



(or

㽶Ƶֱ

) document.head.appendChild(flippScript); window.flippxp = window.flippxp || {run: []}; window.flippxp.run.push(function() { window.flippxp.registerSlot("#flipp-ux-slot-ssdaw212", "Black Press Media Standard", 1281409, [312035]); }); }