It's the day of Canada's interest rate decision again.
The central bank announced this morning that it would keep its key overnight interest rate at 5%. In addition, in order to control the economy, the Bank of Canada decided to continue quantitative tightening.
Central Bank Governor Tiff Macklem said at a press conference that interest rates could be lowered in June, given the current state of the economy.
He noted that while some positive signs of inflation have started to emerge since January, bank officials want more time to confirm whether these trends are sustained to ensure that this is not just a temporary phenomenon.
Rising housing costs remain an inflation risk factor
In the statement, the Bank of Canada highlighted that inflation remains elevated despite the decline in the consumer price index and core inflation in recent months, which is a risk.
The central bank said it would need to wait for more evidence to confirm whether this downward trend could be sustained before considering a rate cut.
In particular, the statement noted that the central bank is closely monitoring changes in core inflation and continues to assess the economy's supply-demand balance, inflation expectations, wage growth, and corporate pricing behavior.
In February, CPI inflation fell to 2.8%, indicating that the pressure on rising prices for goods and services has eased. However, the central bank noted that inflation in housing costs remains high due to rising rents and mortgage interest.
In addition, core inflation has been stable around 3.5% for a long time, falling only slightly in February, just above 3%. The annualized inflation rate over the past 3 months shows a downward trend.
The central bank forecasts that CPI inflation will be close to 3% in the first half of this year and fall below 2.5% in the second half of the year, and is expected to reach the 2% inflation target in 2025.
Andrew DiCapua, senior economist at the Canadian Chamber of Commerce, pointed out that although the forecast for gross domestic product (GDP) growth is more optimistic, and inflation is expected to be lower by the end of the year, the uncertainty of energy prices remains a challenge for central banks. He said the central bank would review the additional three months of inflation data and its positive developments at its June meeting.
The jury is still out on when interest rates will be cut
In last month's policy rate discussions, policymakers failed to agree on the economic indicators needed to cut rates, but agreed that the first rate cut could be in 2024. There were divergent views on when interest rates could be cut based on sufficient economic evidence and how to assess the economic outlook and risks faced by central banks.
Economists are divided on when to start cutting interest rates. Some predict that it could be as early as June, while others believe that September may be more appropriate. As the economy appears to have outperformed expectations, while inflation risks remain, some forecasters have revised up their forecasts.
On the international front, the Bank of Canada's forecast points out that the global economy is expected to continue to grow at a rate of about 3%, with inflation expected to gradually decline in most developing economies.
Economic growth is expected to accelerate
The U.S. economy has shown surprisingly resilient results, helped by resilient consumer spending and strong corporate and government spending. US GDP growth is expected to slow in the second half of the year, but still exceed expectations in January. At the same time, the Eurozone economy is expected to gradually recover from the current downturn.
Global oil prices have risen since the start of the year, about $5 above the level set in the January Monetary Policy Report (MPR), bond yields have risen, but overall financial conditions have eased somewhat despite the narrowing of corporate credit spreads and a significant rise in equities.
The World Bank has revised its forecast for global GDP growth to 2.55% in 2024 and expects growth to stabilize at about 3% in 2025 and 2026. While inflation is expected to continue to moderate in most developed countries, the process is likely to be challenging, with inflation expected to fall to central banks' target levels by 2025.
In the second half of last year, Canada's economic growth stagnated and faced the challenge of oversupply. Several indicators of the labor market are showing signs of slowing, with job growth lagging behind the growth of the working-age population, with the unemployment rate gradually climbing to 6.1% in March. Recent data shows that the pressure on wages to rise is starting to ease.
Canada's economic growth is expected to accelerate in 2024, driven by the momentum of population growth and the recovery of household consumption. Housing investment has strengthened to meet the growing demand for housing, while government spending has been boosting economic growth. Business investment is expected to pick up gradually, and exports will also maintain strong growth.
According to the central bank's forecast, GDP growth will be 1.5% in 2024, 2.2% in 2025 and 1.9% in 2026. This suggests that excess supply will be gradually absorbed in 2025 and 2026 as the economy strengthens.
While inflation remains elevated and uncertain risks, the pace of growth in the consumer price index (CPI) and core inflation has slowed in recent months. The Bank of Canada is closely looking for clear evidence of a sustained downtrend and will pay particular attention to the development of core inflation.
At the same time, the central bank will continue to monitor the economy's supply and demand, inflation expectations, the pace of wage growth, and the pricing strategies of companies. The Bank of Canada is firmly committed to working tirelessly to ensure domestic price stability and restore economic balance.
Canadians have become accustomed to high interest rates
A new debt survey shows that a growing number of Canadians have become accustomed to higher interest rates and could even afford to raise them by another 1 percentage point.
MNP Ltd.'s latest Consumer Debt Index survey showed that 25 percent of respondents could afford higher interest rates, a 3 percentage point increase from the previous survey, and 24 percent said they could pay $130 more in interest per month if necessary, an increase of 5 percentage points from the previous survey.
Grant Bazian, president of Bankruptcy Experts, said in a press release: "The theme of the latest report is that it's not that bad. "
This sentiment is also reflected in MNP's Consumer Debt Index, which jumped from 83% to 91%, well below its all-time low of 77% at the end of December 2022.
The quarterly index measures Canadians' attitudes toward their consumer debt and measures their ability to pay their bills, respond to unexpected spending, and interest rate changes without being on the verge of bankruptcy. The closer the index is to 100 or higher, the better people feel about their finances.
Only 41 per cent said they were concerned about their debt levels, down 6 percentage points from December, and 44 per cent said they regretted the amount of debt they had incurred in the past, down from 47 per cent.
But that doesn't mean it's all smooth sailing for your personal finances. More than half of Canadians still say they will be in trouble if interest rates rise, but central bank governor Tiff Macklem said he believes rates have reached the level needed to bring inflation under control.
The MNP survey was conducted between March 8 and 15 by the civilian research agency Ipsos SA and was based on interviews with 2,000 adults. With provincial budgets submitted and federal budgets due next week, many taxpayers and investors are feeling less optimistic about the state of the economy, in part because Canada's 10 provinces are expected to have a combined annual deficit of more than $30 billion, the largest deficit ever recorded outside of the pandemic.
The Bank of Canada's next interest rate decision date is June 5. Subsequently, in its July 24 interim results report, the Bank of Canada will provide an in-depth analysis of the economy and inflation, including a forecast of future risks.