This is far, very far from being won for the Bank of Canada. High inflation persists. Worse, the risks lean more towards a reacceleration, a risk that is reinforced by an unaccommodating geopolitical situation.
The Bank of Canada retained the status quo and maintained its key rate at 5%. But his speech is rather tinged with gray, even dark gray, regarding the future of things. In his Monetary Policy Reportshe speaks of forecasts “imbued with considerable uncertainty”.
From the outset, the central bank emphasizes that the signs of an economic slowdown are more numerous. She even foresees the emergence of a situation of excess supply as early as this quarter. She also welcomes the slowdown in the rise in food prices, and to note that the moderation in price increases affecting many goods is starting to spill over to services. But core inflation is proving more stubborn than expected, with three-month rates remaining high, oscillating between 3.5% and 4% over the past year. Progress towards price stability is slow while inflationary risks have increased, she laments.
The Bank forecasts that inflation as measured by the Consumer Price Index will average 3.5% until mid-2024, before gradually falling and returning to 2% in 2025, a return to the target which had already been pushed back by a year.
She does not hesitate to speak of a rate of return to the 2% target which remains “highly uncertain”. And despite the wide gap between its overnight target rate of 5% and a neutral nominal interest rate in the range of 2% to 3%, the central bank now expects inflation to remain higher in the short term “due to rising energy prices and the persistence of high core inflation”.
In short, “since inflation has exceeded the target for two years and is expected to remain slightly above 3% for another year, it is the upward risks that mainly concern the Bank,” we read. Here, the list of sources of concern is rather long.
Inflation expectations remain very high, companies continue to raise prices more often and more substantially than usual and wage growth remains around 4% to 5%. On this last point, companies anticipate an average annual inflation rate of 3% to 3.5% over the next two years while consumers’ expectations are for an average of 5% in 2024 and 4% for the next two years. the following year, which can only further influence the establishment of wages and prices.
The Bank of Canada adds that in addition to high mortgage interest, rents and other housing costs are still increasing at a high rate. In fact, the increase in housing costs increased to 8% over three months and became widespread. “Contrary to what happened in previous cycles, the rise in the cost of mortgage interest is not strongly offset by the weakness of other housing components,” she explains.
Another element, “energy prices no longer pull inflation down, but rather accentuate upward pressure”. To this end, the war between Israel and Hamas creates a new source of geopolitical uncertainty, with the risk that it evolves into a larger-scale regional conflict, disrupting the oil supply and propelling energy prices. towards an increase.
Demographic effect
The list grows with a demographic question playing spoilsport. The institution underlines that public spending strongly contributes to growth, with an average increase of 2.5% in 2024, higher than that of potential production, estimated at around 2% over the projection period. Growth supported by “a significant demographic surge, attributable to strong immigration and the uninterrupted arrival of a large number of temporary residents,” she takes care to specify.
This is the case for the increase in housing costs, which is expected to remain strong driven by the increase in the cost of mortgage interest, the rise in rent prices and the increase in other housing costs. This increase in rents and other housing costs can also be explained, in large part at least, by the strength of the demand for housing – which is fueled by rapid population growth – and the structural deficiency in the supply of housing. ‘dwellings.
This demographic factor can also explain why GDP growth was 1% on average over the last year, even if GDP per capita instead showed a decline of 1.6% during the same period. “Although overall consumption is supported by strong population growth, per capita consumption is expected to decline further for most of 2024,” the Report adds.
On the positive side, at most it points to a strong rise in medium- and long-term bond rates since July — to reach levels not seen since before the 2008 global financial crisis — and to the tightening of bond conditions. credit, to see in it a certain support for the policy of monetary austerity.
The Bank warns, however, that “if the rise in bond yields turns out to be larger or more persistent than expected, the negative effects on the prices of stocks and other assets could become more pronounced.”