In an analysis today, Claire Fan, Economist, at RBC Economics explored the Bank of Canada's decision to keep the rate unchanged. This decision continues the banks approach for the time in a row since adjustments were last made in July of the previous year. Fan views the banks stance as cautious pointing out that lower inflation numbers from January have reinforced their reluctance to raise interest rates. She highlights the banks communication strategy indicating that progress is being made towards meeting inflation targets. Acknowledges that this goal has not been fully reached yet.
Fan notes that the Bank of Canada highlighted domestic demand in the fourth quarter of last year and decreasing wage pressures as signs that higher interest rates are effectively slowing down economic activity although not enough to completely eliminate inflation risks. She discusses the progress in reducing inflation indicators favoured by the bank like CPI trim and CPI median, which despite a decrease in January data still exceed Canada's upper inflation target threshold of 3%.
During a press conference – which marked a departure, from Monetary Policy Report meetings – Governor Macklem emphasized the banks focus on how long high interest rates will be maintained. However he made it clear that its too early to consider lowering the policy interest rate. Fan believes that the current weak economic conditions and the slight surplus, in the economy point towards a chance of decreasing inflation than an increase with inflation expected to stay around 3% before slowly decreasing in the latter part of the year.
Fan also mentions that there hasn't been any announcement about the end of the Quantitative Tightening (QT) program. Future guidance is expected in Gravelle's speech on March 21 regarding balance sheet normalization. She is eager for the Banks surveys on Canadian businesses and consumers which will offer more insights into inflation and wage expectations as well as how companies are pricing their products before the April meeting.
In summary Fan sees the Bank of Canada's decision to maintain the rate as a sign that current interest rates are sufficiently high to control economic activity and ease price pressures. She predicts a decrease in the policy rate, by mid year depending on indications of core inflation easing.
Source: Adapted from source: "RBC Economics - RBC Thought Leadership." RBC Thought Leadership, 13 Sept. 2022, thoughtleadership.rbc.com/economics.
