The Bank of Canada ends a series of eight consecutive rate increases by maintaining its target for the overnight rate at 4.5%. The evolution of the economy, world and Canadian, remains within the parameters foreseen in its Monetary Policy Report of January. But significant risks remain.
The Bank of Canada points here in the direction of a rebound in Chinese economic expansion: “The strength of the recovery in China and the repercussions of Russia’s war on Ukraine remain important sources of risks to the rise. She is also keeping an eye on the strengthening US dollar. In Canada, “the labor market remains very tight and wages continue to increase at a rate of 4 to 5%, while productivity has fallen in recent quarters”.
She also warns that while the one-year core inflation measures have fallen ever so slightly to around 5%, while the three-month readings are around 3.5%, “both of these numbers will have to come down further. , as well as short-term inflation expectations, for inflation to return to the 2% target”.
However, it is counting on the weak growth expected in the coming quarters, which “should moderate wage growth and also increase competitive pressures, making it more difficult for companies to pass on their cost increases to consumer prices”.
By retaining the status quo, the central bank’s Governing Council also recalled that quantitative tightening, in the form of balance sheet reduction, “is a complementary tool to this restrictive posture”, exerting upward pressure on the curve. of yield.
The table was set
Recent statistics militated in favor of such a pause. But that was not the case with the signals emanating from the labor market, with a strong increase of 150,000 jobs in January and an unemployment rate holding steady at 5%. Total hours worked also increased, by 0.8% in January, up 5.6% from a year earlier. In short, the labor market remains under pressure, pressure fueled by the large number of vacant positions.
Otherwise, the table was set for the 425 basis point surge in eight bursts in the rate
director started a year ago is continuing its work. On the inflation side as measured by the consumer price index (CPI), the year-over-year increase was reduced to 5.9% in January, following a rise of 6, 3% in December, due to a year-on-year effect. Statistics Canada adds that, excluding the volatile components of food and energy, prices rose 4.9%. Excluding the cost of mortgage interest, the increase was 5.4%.
Another indicator, the implicit price index of GDP — an economy-wide measure of prices — fell 0.7% in the fourth quarter. This is the second quarterly decline in a row.
Finally, GDP remained unchanged in the fourth quarter of 2022, after five consecutive quarters of growth. And it contracted by 0.1% in December. Statistics Canada’s preliminary estimate indicated annualized growth of 1.6% for this quarter. For its part, the Bank of Canada was expecting 1.3%.
A hard-felt rate hike
All of this is to be put in the perspective that households continue to grapple with marked increases in the prices of food purchased in groceries and restaurants. These prices rose again, at a faster pace from one year to the next, in January (+10.4%) compared to December (+10.1%). On the real estate side, house prices rose at a slower pace, reflecting the continued slowdown in the residential real estate market. But, at the same time, the mortgage interest cost index continued to grow at a faster pace in response to higher interest rates, which rose 21.2% year on year in January — the most strong growth since September 1982 — after rising 18% in December, says Statistics Canada.
And on balance, the total number of insolvency files filed in January 2023 increased by 33.7% compared to January 2022. A percentage that includes a 33% increase in consumer files and 55.4% in those businesses, according to data from the Office of the Superintendent of Bankruptcy. During the 12-month period that ended on January 31, the total number of insolvency files increased by 15% compared to the corresponding period ended on January 31, 2022. It was up by 14.3 % among consumers, 39.1% among businesses.
Currency decoupling
It will remain to maneuver with a decoupling of monetary policies. The Canadian dollar exchange rate is under pressure as the US Federal Reserve (Fed) grapples with unabated inflation and an economy that does not stall. Some U.S. analysts see the Fed’s key rate moving from its current 4.5-4.75% range to hit 5.25% or even 5.5% sometime this summer, reaching its all-time high since 2011.
Federal Reserve Chairman Jerome Powell warned on Tuesday that more teeth will be needed and that the key rate could continue to rise above 5.1%, the level at which officials of the institution the saw until now stop.