(Ottawa) Several financial observers predict that the Bank of Canada will preach patience during its announcement on its key rate which will be made next Wednesday.
Economists say weakening economic conditions set the stage for rate cuts in the coming months. The central bank is generally expected to keep its key rate at 5%, while many forecasters anticipate a first rate cut around June.
According to these analysts, the slowdown in the Canadian economy is generally in line with what the central bank expected and hoped.
According to Royce Mendes, general manager and head of macroeconomic strategy at Desjardins Group, “domestic spending was lower in the fourth quarter compared to the third quarter. And this is particularly concerning, given that the population has increased so dramatically during this period. »
The Canadian economy grew by an annualized 1% in the fourth quarter, which exceeded the expectations of economists and the most recent forecasts from the Bank of Canada. But the overall figure seems to mask the real weakness of the Canadian economy.
Economic growth in the final three months of the year was driven by global factors, including strong spending trends in the United States, which boosted Canadian exports. Meanwhile, on a per capita basis, real gross domestic product (GDP) continued to decline in the fourth quarter.
“This is probably the most anemic 1% growth that any of us have experienced,” said Douglas Porter, chief economist at BMO Financial Group.
The Bank of Canada’s aggressive rate hikes are largely to blame for the economic slowdown. Consumers have cut back on spending as many faced higher borrowing costs on their mortgages and other debts. Businesses are also feeling the effects, as evidenced by the drop in their investments.
Perhaps the only exception in economic data is the labor market. According to Statistics Canada’s Labor Force Survey, the unemployment rate fell to 5.7% in January, hovering around pre-pandemic levels, while annual wage growth remained above 5%.
However, Royce Mendes claims that payroll data from Statistics Canada suggests that labor market conditions are weakening more significantly. “I think the Bank of Canada looks at all of this data together and will come to the conclusion that the labor market has weakened since the January monetary policy report was released.”
The slowdown in the Canadian economy, combined with improving supply chains for goods, has paved the way for a slowdown in price growth. Canada’s annual inflation rate fell to 2.9% in January, returning to the Bank of Canada’s target range of 1% to 3%.
However, the central bank has often indicated that it will remain on guard as long as the inflation rate does not return to a sustainable path of 2%. This means that inflation is expected to continue to fall steadily and that core measures of inflation, which exclude volatile price movements, are expected to follow suit.
Royce Mendes intends to closely examine the central bank’s comments on inflation, looking for a signal on the direction it will take its key interest rate. The Bank of Canada has often stressed that its two main inflation measures are well above its target, suggesting that price growth remains stubbornly high.
But Royce Mendes’ research suggests that these inflation measures remove too many components, making it harder to gauge the direction the Consumer Price Index (CPI) is heading. “I would at least expect the Bank of Canada to take a more holistic view of inflation indicators and recognize the progress we are seeing in controlling underlying inflationary pressures. »