According to Josh Nye, a senior economist at the Royal Bank of Canada (RBC), the Bank of Canada's decision to maintain its overnight rate at 4.50% was widely expected, given the bank's clearly signaled pause in January. In addition, the mixed economic data over the past six weeks was insufficient to provide evidence in favor of resuming the tightening cycle.
Nye noted that the policy statement was fairly balanced, with the BoC reiterating a conditional pause and maintaining a tightening bias but not sounding inclined to act on it. The statement acknowledged disappointing Q4 GDP growth, but attributed the miss to a significant inventory drawdown. The BoC also noted that restrictive monetary policy is weighing on household spending.
Regarding the labor market, Nye pointed out that the BoC took note of January's surprisingly strong job gain and still-firm wage growth. However, weak productivity is out of line with wage growth. Nye noted that further slowing in 3-month measures of core inflation were seen as in line with the bank's forecast for inflation to slow to 3% by mid-year.
He also observed that while the BoC has hit pause on its tightening cycle, other central banks, particularly the Fed and ECB, are set to raise rates further than previously expected. The statement noted stronger near-term outlooks for growth and inflation in the US and Europe, as well as upside risks to the commodity price outlook from the reopening of China's economy and the war in Ukraine. This has contributed to tightening global financial conditions and a stronger US dollar. The Canadian dollar is now at its lowest level since mid-2020 on a trade-weighted basis.
In Nye's view, the BoC remains in a wait-and-see mode and will likely need to see more evidence of sustained economic growth and inflation before resuming its tightening cycle. Although the market has priced in significant odds of one more hike by the BoC later this year, today's policy statement did nothing to endorse that view. As a result, the market reaction has been mildly dovish.
Footnote:
1 Adapted from source: "RBC Royal Bank." 8 Mar. 2023,
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4cafe601e72d74c2e921ab633eaeb826cc14c3ca8e4837c651dde6bd0
f4af10829ee5e5."
