On March 8, 2023, the Bank of Canada maintained the overnight rate. This is in line with what was telegraphed from prior meeting’s announcement. “Inflation, while still too high, is coming down due primarily to lower energy prices. Employment growth has been surprisingly strong.” Global impacts mentioned: “United States and Europe, near-term outlooks for growth and inflation are both somewhat higher than expected in January. Strength of China’s recovery and the impact of Russia’s war in Ukraine remain key sources of upside risk.”
This month’s announcement ended with same statement as last month: “Governing Council will continue to assess economic developments and the impact of past interest rate increases, and is prepared to increase the policy rate further if needed to return inflation to the 2% target. The Bank remains resolute in its commitment to restoring price stability for Canadians.”
Following later that week, the Canadian jobs report was released and pointed to sticky labour and unemployment numbers, with unemployment rate holding steady at 5%, near a record low. Also troubling to the Bank of Canada was the rise in wage inflation. This could jeopardize the rate pause. Next rate announcement April 12.
NOW LET’S TALK ABOUT THE US
Up to this current rate announcement, Canada and US have raised their rate by the same amount, total of 4.25% since last spring. Canada is the first one to signal a rate pause. The US has been using much stronger language regarding the continuation of rate increases. Here we may start to see a divergence. Canada is more sensitive to interest rates, as housing is a large part of our economy, which means we don’t need to tweak the rate as much as the US, to see changes. Theoretically we could run on divergence of up to 1.00%. But it is a delicate balance, as this will trigger further declines in the Canadian dollar, which in turn will affect our inflation.
All eyes area on US Fed rate meeting on March 22, to see if they will raise rate. This week US had data published. Unemployment rate came in higher than expect, but also their annual inflation rate showed that it is slowing.