Further hikes in 2023 can't be ruled out, says chief economist
The Bank of Canada’s decision to leave its benchmark rate untouched in its March announcement signals a “conditional” pause that will see rates remain as they are unless economic trends change unexpectedly, according to BMO’s chief economist.
Doug Porter (pictured) told Canadian Mortgage Professional that the central bank’s policy rate statement on Wednesday, which was its first for over a year not to include a rate hike, featured an “absolutely non-controversial” description of the economy that gave it breathing space either to keep the rate unchanged or increase it further in the months ahead.
“I think the key takeaway here is it’s a conditional pause,” he said. “If the economy continues to operate largely as they expected, the Bank won’t move on rates, but they’ve definitely left themselves with the ability to hike rates.”
Fed’s pull-no-punches approach could prove significant for Canada
The aggressiveness of the US Federal Reserve, whose chair Jerome Powell has indicated that it’s ready to raise rates even further, could present complications for the Bank of Canada down the road, Porter said, especially in the event that the loonie continues to plummet as the possibility of deviation between the Canadian and US approaches.
Variable interest rates in Canada remain high despite the Bank’s decision to hit pause on hikes – and upward pressure on longer-term rates via the bond market has also recently been a feature of recent weeks.
Federal Reserve Chair Jerome Powell says recent data suggests "the ultimate level of interest rates is likely to be higher than previously anticipated."— The Associated Press (@AP) March 7, 2023
Powell is currently speaking to a Senate panel on the state of the U.S. economy. https://t.co/rBhwqetMNv pic.twitter.com/XWsSaYKV2b
“The fact that US inflation and growth have been stronger than expected has spilled over into Canadian bonds and has tended to put a bit of upward pressure on some of the longer-term rates,” Porter said. “I think that’s something we’re going to be dealing with at least through the first half of the year: a Fed that’s still breathing fire, still pushing rates higher.
“As Powell said, there’s a lot more to do in the US, though he might just be talking very tough and in reality might not live up to [that] rhetoric. But he’s talking very tough indeed, and so I don’t think there’s going to be any relief for Canadian borrowers, and there still is a pretty significant risk that the Bank of Canada will also decide they need to lift rates a little bit further.”
What happens if inflation stays high?
The Bank still expects CPI (consumer price index) inflation to sit around 3% by the middle of this year, marking no change from its January announcement. While Porter said that headline figure is likely to decrease in the coming months, so-called core inflation – price changes in goods and services excluding the price of food and energy – cold prove more resilient.
“Provided energy prices don’t do anything too dramatic in the next three to six months, we should just by the arithmetic of these things see the headline inflation come down a fair bit,” he said. “Now, the debate is whether it comes down enough to satisfy the Bank or not.
“And we still believe that some of the underlying price measures might be a little bit sticky in the months ahead, and there might be a little bit of disappointment on so-called core inflation in the next six months.”
All in all, the Bank’s announcement should be taken as one with upsides and downsides, Porter said. It has reached a possible endpoint on rate hikes more quickly than its international counterparts – but the uncompromising language of the Fed means further increases later in the year can’t be ruled out.
“That is an important step by the Bank of Canada. The last major central bank outside of the Bank of Japan that did not increase interest rates at a decision was the European Central Bank, way back last June,” he said.
“Since the middle of last year, every single central bank has used every single opportunity to raise interest rates. So it is a pretty important step that the Bank has taken here by moving to the sidelines – that’s the good news. The bad news is we’re not necessarily done, and some of that pressure is definitely emanating from the US.”
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