At its meeting earlier this month, the Bank of Canada left its key policy rate at a 15-year high of 4.5% for a second time in a row. The decision to hold came after discussing a possible rate rate increase due to stronger-than-expected growth, a tight labor market and concerns about inflation in the services sector. The bank struck a hawkish tone, playing down market expectations for a cut this year as the risk of a recession has diminished. The bank expects positive but weak growth during the remaining three quarters of this year.
For the fourth consecutive month, the unemployment rate was 5.0% in March, just above the record low of 4.9% observed in June and July of 2022. However, the Canadian economy grew less than expected in February and likely contracted in March, data showed on Friday – figures that back up the central bank’s plans to keep interest rates on pause. The slowdown in February is broadly-based.
February gross domestic product gained 0.1%, less than the 0.2% increase forecast by analysts, after an upwardly revised 0.6% expansion in January. March GDP was most likely down 0.1%, Statistics Canada said in a preliminary estimate. The flash estimate for March, which may change when a final tally is released next month, means the economy likely grew 2.5% on an annualized basis in the first quarter. The Bank of Canada has forecast a 2.3% rise in real GDP in the first quarter.
Canadian inflation continued to ease in March, coming in at 4.3% year-over-year. It is expected that inflation will fall to 3% in the coming months. The challenge for the central bank is getting back to its target level of 2%. While the market has been expecting a rate cut later this year, the minutes from the Bank of Canada policy meeting indicate that “Governing Council members agreed that while a risk of a sharper slowdown remains, based on their current outlook, cutting rates later this year did not seem to be the most likely scenario.”
The divergence between the market and the central bank may be due to US market developments. In the US, we see a disconnect between financial stability and price stability. Rates are too low for price stability but too high for financial stability. The US bond market is betting that with the Treasury’s options limited without congressional support, policy makers will struggle to manage financial instability. While we do not have this disconnect, the uncertainty in the US market gives more scope for rate declines in Canada.
Independent Opinion
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