Bank of Canada holds key interest rate at 4.5%, bumps up growth forecast for 2023

Bank of Canada holds key interest rate at 4.5%, bumps up growth forecast for 2023

Click the link above to read the full article. The article was published on April 12, 2023 and written by the Canadian Press.

For the second straight month the Bank of Canada is holding its key interest rate steady. The pause continues from Tiff. After almost a year of increases, we are finally seeing a reprieve.

A few highlights from his report: 

The central bank said Wednesday that recent economic data is reinforcing its confidence that inflation will continue to fall in the coming months.

The Bank of Canada continues to expect the inflation rate to fall to 3% by mid-year and back down to 2% by the end of 2024.

Whether inflation will hit 3% or not by mid-year we think is the point most up for debate. The late cycle inflation factors are often the most sticky, meaning they can linger for longer. We will have to continue to watch the numbers and data as they come in. Inflation would have to start decreasing at a higher rate to see it fall back to 3% by mid-year, from its current 5.2%.

Tiff Macklem, Bank of Canada's Governor seems to be leaving the door open to every possibility, from a recent interview on April 14, 2023, see his comments below.

The Bank of Canada said “demand is still exceeding supply and the labour market remains tight.”

Demand still appears to be strong. Jerry and CJ argue about this fact - Jerry would say that the eye test tells you that demand is strong. Which is tough to argue. You need to look at retail sales numbers and trends to start seeing demand coming down. CJ thinks that even if we are/when we get a recession, depending on the depth, Canadians need to continue living their lives, buying goods, paying for services and experiences. The eye test may not reveal a slowdown.

In terms of the labor market, we have talked about this on the podcast before - unemployment tends to be led by negative sentiment. What that means is when the upper management/owners of the company hear that we are in a recession, they will want to cut costs and let people go (resulting in increasing unemployment). If we are avoiding the recession, as we seemingly have been - one of the last things most owners want to do is lay people off.

The chart below shows this perfectly. The grey bars are recessions (US recessions- which Canadian recessions are quite close to) the red line is the Canadian unemployment rate, the blue line is the US unemployment rate. You can see they reach their height most times coming out of the recession. You can see that during most there is barely an uptick in the unemployment rates as the recession starts. The idea that unemployment needs to dramatically increase or start rising prior to a recession is just not true. It really is an outcome of a recession, not a reason for a recession.

A few of the concerns from the central bank and what they are watching (along with us)...

The central bank’s concern stems from several factors, including consumers and businesses expecting future inflation to be higher than the Bank of Canada’s forecasts. It’s also concerned about prices for services still rising rapidly — in part due to rapid wage growth — and businesses still able to easily pass on higher prices to consumers.

The article was published on April 12, 2023 and written by the Canadian Press, and posted on Investment Executive.

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