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The Bank of Canada Maintains Interest Rates

The Bank of Canada painted a picture of a worsening economy but not one that needs a cut in interest rates quite yet in its Dec. 6 rate announcement. The central bank pointed to a few ongoing areas of strength and concern, saying it “remains prepared to raise the policy rate further if needed.” But economists don’t see a need for further rate hikes as recessionary conditions build. A key measure of worry cited is gross domestic product (GDP) on a per capita basis, which Oxford Economics (OE) noted has been in a recession since late 2022.Closely related to this is productivity, which has declined for a sixth consecutive quarter, as reported by Statistics Canada on Dec. 6. “I was hoping [for] that vocabulary around ‘we’re ready to raise rates once again’ not being there because clearly, from my point of view and from most people’s point of view, there’s little to no signs that the Canadian economy needs further rate hikes,” David-Alexandre Brassard, chief economist of Chartered Professional Accountants of Canada (CPA), told The Epoch Times on Dec. 6. He said it would be odd to hike rates further when the inflation problem is mainly in housing costs where higher rates lead to higher costs. Year-over-year mortgage interest costs were rising by over 30 percent in the summer. “There’s a strange dissonance in the fact that they’re mentioning they’re ready to hike again to control inflation on which rates will have little impact,” Mr. Brassard said.

BMO chief economist Doug Porter said in a Dec. 6 note that markets are pricing in rate cuts even if the BoC is clearly not entertaining them presently. “Maintaining the hiking bias is likely driven entirely by a desire to continue dampening Main Street inflation expectations and keeping a lid on housing speculators, even as markets are pricing in more than 100 bps [1 percentage point] of cuts next year,” he said. OE’s director of Canada Economics Tony Stillo said in a Dec. 6 note that the Canadian economy slipped into a moderate recession in the third quarter and that it will likely last through the first quarter of 2024. “We think further rate hikes are unnecessary as slack continues to build during the recession,” he said.

But while the phrase “inflationary risks have increased” from the central bank’s Oct. 25 statement was not to be found in the December statement, the BoC said it wants to see “further and sustained easing in core inflation.” Overall inflation has fallen from 5.9 percent in January to 3.1 percent in October. However, core inflation indicators—which exclude “particularly volatile” items such as food and energy prices in order to “better reflect the underlying trend of inflation”—remain a bit higher, at 3.5 to 3.6 percent. The BoC also noted that government spending and new home construction are boosting the economy and that wages are still rising by 4 to 5 percent.

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