According to Nathan Janzen and Carrie Freestone, economists at RBC Economics, the Bank of Canada (BoC) is anticipated to maintain the overnight interest rate next week. This follows a conditional pause announced in January, which saw the central bank putting a halt to rate hikes. This decision comes even as the Canadian economy has shown greater resilience than initially predicted, with growth at around 2.5% instead of the expected 0.5%. Furthermore, labor markets remain robust, with 35,000 new jobs created in March.
The BoC's initial pause in interest rate hikes was driven by the expectation that economic growth would stall until mid-2023. Governor Macklem indicated that it would require an "accumulation of evidence" contradicting this expectation for the central bank to resume tightening. Janzen and Freestone believe that this test has not yet been met, and the effects of the previous year's aggressive interest rate increases have not fully rippled through the economy. The Q1 Business Outlook Survey conducted by the central bank revealed that businesses continue to anticipate slower sales growth in the upcoming year. Additionally, while supply chain constraints have eased, concerns persist regarding credit and the impact of higher interest rates on customer demand. The Survey of Consumer Expectations suggests that Canadians may soon reduce spending due to increased interest rates and the higher cost of essential goods affecting purchasing power.
Janzen and Freestone also highlight that the recent moderation in inflation readings is encouraging, particularly as this softening has occurred before the full effect of higher interest rates impacts household purchasing power. They also note that the recent round of financial instability serves as a reminder that aggressive interest rate increases over the last year could have unforeseen consequences. Despite inflation and the broader economy still running hot, the BoC is not expected to actively consider cutting interest rates. Instead, maintaining the status quo appears to be an easy decision for the central bank at this time.
In terms of upcoming data, the economists will be watching for several key indicators. The U.S. year-over-year CPI inflation rate is projected to fall by almost a full percentage point to 5.1% in March, driven primarily by a decline in energy prices and slightly lower food price growth. Core inflation (excluding food and energy) has been more persistent than anticipated but is also expected to decrease. Home rents have been a major contributor to core price growth, but should begin to slow as softer growth in current market rents gradually affects the CPI measure through lease renewals.
Additionally, Statistics Canada's advance estimate of February manufacturing sales revealed a 2.8% decline, led by lower sales in motor vehicle, beverage and tobacco, primary metal, and food industries. Janzen and Freestone estimate that lower prices, mainly due to a drop in petroleum prices, account for about half of the nominal February sales decline. Meanwhile, U.S. retail sales likely experienced a second consecutive decline in March (-0.2%), attributed to a price-related drop in gas station sales (-4.5%) and softer motor vehicle sales. RBC Economics expect U.S. industrial production to increase by 0.6% in March, driven by a weather-related boost in utility output (7.1%) and a slight increase in manufacturing output (0.2%).
Footnotes:
1 Adapted from source: "RBC Royal Bank." 7 Apr. 2023, view.website.rbc.com/?qs=0c489a34889ae73130a84d4376e531754f51439d0c6e975d227b36e072f4b13caed378f171c06f221089927c04ea9c9ac18f45e77d541a133282a0f4371a97e5296825127170d3cd.
2 "RBC Economics - RBC Thought Leadership." RBC Thought Leadership, 13 Sept. 2022, thoughtleadership.rbc.com/economics.
3 Photo by LuĂs EusĂ©bio on Unsplash
