Sometimes, we see clearer looking in on another economy, and the dynamics in Canada are mirroring Australia, and New Zealand, so when the Bank of Canada Governor Tiff Macklem discussed the latest Monetary Policy and decision, it was relevant more broadly.
They held target for the overnight rate at 5% and warned that while rates might have to go higher if inflation reaccelerated, their base case was a pause, for some time, waiting the for effects of higher rates to pull inflation into target – a target not expected to be met for some long time. The Bank is also continuing its policy of quantitative tightening.
Global economic growth continues to slow, with inflation easing gradually across most economies. While growth in the United States has been stronger than expected, it is anticipated to slow in 2024, with weakening consumer spending and business investment. In the euro area, the economy looks to be in a mild contraction. In China, low consumer confidence and policy uncertainty will likely restrain activity. Meanwhile, oil prices are about $10 per barrel lower than was assumed in the October Monetary Policy Report (MPR). Financial conditions have eased, largely reversing the tightening that occurred last autumn.
The Bank now forecasts global GDP growth of 2½% in 2024 and 2¾% in 2025, following 2023’s 3% pace. With softer growth this year, inflation rates in most advanced economies are expected to come down slowly, reaching central bank targets in 2025.
They called out risks to this forecast:
Digital Finance Analytics (DFA) Blog
Rate Pause Perhaps, But Not A Cut Anytime Soon In Canada!
Sometimes, we see clearer looking in on another economy, and the dynamics in Canada are mirroring Australia, and New Zealand, so when the Bank of Canada Governor Tiff Macklem discussed the latest Monetary Policy and decision, it was relevant more broadly.
They held target for the overnight rate at 5% and warned that while rates might have to go higher if inflation reaccelerated, their base case was a pause, for some time, waiting the for effects of higher rates to pull inflation into target – a target not expected to be met for some long time. The Bank is also continuing its policy of quantitative tightening.
Global economic growth continues to slow, with inflation easing gradually across most economies. While growth in the United States has been stronger than expected, it is anticipated to slow in 2024, with weakening consumer spending and business investment. In the euro area, the economy looks to be in a mild contraction. In China, low consumer confidence and policy uncertainty will likely restrain activity. Meanwhile, oil prices are about $10 per barrel lower than was assumed in the October Monetary Policy Report (MPR). Financial conditions have eased, largely reversing the tightening that occurred last autumn.
The Bank now forecasts global GDP growth of 2½% in 2024 and 2¾% in 2025, following 2023’s 3% pace. With softer growth this year, inflation rates in most advanced economies are expected to come down slowly, reaching central bank targets in 2025.
They called out risks to this forecast:
First, inflation expectations have come down only very modestly over the past few quarters. If households and businesses continue to expect inflation to stay elevated, this could impede the pace at which price and wage growth moderate.
Second, wages have been increasing at a fast pace relative to productivity growth. On average, consumers’ real wages are higher than they were in 2019. Productivity growth is effectively stalled and wages are still rising robustly. Because of this, the Bank remains concerned that cost pressures could add to inflation.
Third, house prices could also rise more than anticipated. This would increase inflation by raising shelter costs. While the base case includes a modest increase in house prices, this forecast is subject to a high degree of uncertainty. This risk could materialize if easing financial conditions lead to stronger-than-expected demand for housing while supply remains constrained.
The conflict in Israel and Gaza and attacks on ships in the Red Sea are affecting seaborne trade in the region and could push oil prices and shipping costs higher. So far, global disruptions from these developments have been contained. But if the conflict were to spread further, oil prices could rise sharply and the prices for traded goods could also increase significantly.
In Canada, the economy has stalled since the middle of 2023 and growth will likely remain close to zero through the first quarter of 2024. Consumers have pulled back their spending in response to higher prices and interest rates, and business investment has contracted. With weak growth, supply has caught up with demand and the economy now looks to be operating in modest excess supply. Labour market conditions have eased, with job vacancies returning to near pre-pandemic levels and new jobs being created at a slower rate than population growth. However, wages are still rising around 4% to 5%.
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The Bank Of Canada lifted rates by a further 25 basis points overnight, to 4.5%, and they continue QT. But they say they will hold now and pause to assess the impact of the rises.
In addition, they will start to publish minutes of their discussions, and also will hold losses on their accounts, rather than sending them back to Government.
Important signals which other Central Banks are likely to emulate and its worth noting how much lower rates in Australia are thanks to a series of lower hikes in Australia. Yet here, inflation was reported as higher than expected yesterday – perhaps we need higher rates here?
http://www.martinnorth.com/
Go to the Walk The World Universe at https://walktheworld.com.au/
Digital Finance Analytics (DFA) Blog
Up To 4.5% And Then Hold Says The Bank Of Canada! [Podcast]
The Bank Of Canada lifted rates by a further 25 basis points overnight, to 4.5%, and they continue QT. But they say they will hold now and pause to assess the impact of the rises.
In addition, they will start to publish minutes of their discussions, and also will hold losses on their accounts, rather than sending them back to Government.
Important signals which other Central Banks are likely to emulate and its worth noting how much lower rates in Australia are thanks to a series of lower hikes in Australia. Yet here, inflation was reported as higher than expected yesterday – perhaps we need higher rates here?
http://www.martinnorth.com/
Go to the Walk The World Universe at https://walktheworld.com.au/
The Bank of Canada lifted the cash rate by less than expected – and people are now redefining “a pivot”. But what does this mean for inflation and future rates, and broader economies. We also look at the market movements.
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Interesting statement from the Bank of Canada, their central bank.
During this time of heightened public health measures intended to limit the transmission of COVID-19, some consumers and businesses are choosing not to use cash to limit potential exposure. Refusing cash could put an undue burden on people who depend on cash as a means of payment. The Bank strongly advocates that retailers continue to accept cash to ensure Canadians can have access to the goods and services they need.
This is important, and like the Reserve Bank of New Zealand who also recently underscored the importance of cash in the economy, it reinforces the importance of keep real money available.
In order to support the continuous functioning of financial markets through the provision of liquidity, the Bank of Canada announced two measures on Thursday.
First, acting as fiscal agent, the Bank
will broaden the scope of the current Government of Canada bond buyback
program. This is intended to add market liquidity and support price
discovery. Until further notice, buybacks will extend across all
benchmark maturity sectors and will be conducted at least weekly.
Regular weekly operations will be conducted on a switch basis. Cash
buybacks will be conducted following nominal bond auctions.
The first operation will be a $500 million
switch operation in the 30-year sector held on Monday March 16.
Additional program details are forthcoming, including the timing of the
first operation.
Second, to proactively support interbank
funding, the Bank of Canada will temporarily add new Term Repo
operations with terms of 6 and 12 months. These operations will occur
bi-weekly starting with the first operation on Tuesday, 17 March 2020.
Details of the first Term Repo operation are as follows:
Amount
Auction Date
Settlement Date
Term (Days)
Maturity Date
$4 billion
17 March 2020
19 March 2020
168
3 September 2020
$3 billion
17 March 2020
19 March 2020
350
4 March 2021
Regular 1-month and 3-month Term Repo
operations will remain in effect but could change with regards to size,
frequency and term depending on prevailing market conditions.
Term Repo terms and conditions remain in effect. The results of the 6- and 12-month operations will be announced on the Bank’s web site by Market Notice.
The Bank of Canada continues to closely
monitor global market developments and remains committed to providing
liquidity as required to support the functioning of the Canadian
financial system.
The global economic outlook remains solid. The US economy is especially robust and is expected to moderate over the projection horizon, as forecast in the Bank’s July Monetary Policy Report (MPR). The new US-Mexico-Canada Agreement (USMCA) will reduce trade policy uncertainty in North America, which has been an important curb on business confidence and investment. However, trade conflict, particularly between the United States and China, is weighing on global growth and commodity prices. Financial market volatility has resurfaced and some emerging markets are under stress but, overall, global financial conditions remain accommodative.
The Canadian economy continues to operate close to its potential and the composition of growth is more balanced. Despite some quarterly fluctuations, growth is expected to average about 2 per cent over the second half of 2018. Real GDP is projected to grow by 2.1 per cent this year and next before slowing to 1.9 per cent in 2020.
The projections for business investment and exports have been revised up, reflecting the USMCA and the recently-approved liquid natural gas project in British Columbia. Still, investment and exports will be dampened by the recent decline in commodity prices, as well as ongoing competitiveness challenges and limited transportation capacity. The Bank will be monitoring the extent to which the USMCA leads to more confidence and business investment in Canada.
Household spending is expected to continue growing at a healthy pace, underpinned by solid employment income growth. Households are adjusting their spending as expected in response to higher interest rates and housing market policies. In this context, household credit growth continues to moderate and housing activity across Canada is stabilizing. As a result, household vulnerabilities are edging lower in a number of respects, although they remain elevated.
CPI inflation dropped to 2.2 per cent in September, in large part because the summer spike in airfares was reversed. Other temporary factors pushing up inflation, such as past increases in gasoline prices and minimum wages, should fade in early 2019. Inflation is then expected to remain close to the 2 per cent target through the end of 2020. The Bank’s core measures of inflation all remain around 2 per cent, consistent with an economy that is operating at capacity. Wage growth remains moderate, although it is projected to pick up in the coming quarters, consistent with the Bank’s latest Business Outlook Survey.
Given all of these factors, Governing Council agrees that the policy interest rate will need to rise to a neutral stance to achieve the inflation target. In determining the appropriate pace of rate increases, Governing Council will continue to take into account how the economy is adjusting to higher interest rates, given the elevated level of household debt. In addition, we will pay close attention to global trade policy developments and their implications for the inflation outlook.
The Bank of Canada is raising its target for the overnight rate to 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.
Recent economic data have been stronger than expected, supporting the Bank’s view that growth in Canada is becoming more broadly-based and self-sustaining. Consumer spending remains robust, underpinned by continued solid employment and income growth. There has also been more widespread strength in business investment and in exports. Meanwhile, the housing sector appears to be cooling in some markets in response to recent changes in tax and housing finance policies. The Bank continues to expect a moderation in the pace of economic growth in the second half of 2017, for the reasons described in the July Monetary Policy Report (MPR), but the level of GDP is now higher than the Bank had expected.
The global economic expansion is becoming more synchronous, as anticipated in July, with stronger-than-expected indicators of growth, including higher industrial commodity prices. However, significant geopolitical risks and uncertainties around international trade and fiscal policies remain, leading to a weaker US dollar against many major currencies. In this context, the Canadian dollar has appreciated, also reflecting the relative strength of Canada’s economy.
While inflation remains below the 2 per cent target, it has evolved largely as expected in July. There has been a slight increase in both total CPI and the Bank’s core measures of inflation, consistent with the dissipating negative impact of temporary price shocks and the absorption of economic slack. Nonetheless, there remains some excess capacity in Canada’s labour market, and wage and price pressures are still more subdued than historical relationships would suggest, as observed in some other advanced economies.
Given the stronger-than-expected economic performance, Governing Council judges that today’s removal of some of the considerable monetary policy stimulus in place is warranted. Future monetary policy decisions are not predetermined and will be guided by incoming economic data and financial market developments as they inform the outlook for inflation. Particular focus will be given to the evolution of the economy’s potential, and to labour market conditions. Furthermore, given elevated household indebtedness, close attention will be paid to the sensitivity of the economy to higher interest rates.
The ultra-low interest rates are hitting savers hard. Stephen S. Poloz, Governor, Bank of Canada spoke on this in his speech “Living with Lower for Longer“. He says that low rates do hit savers, at a time when life expectancy has risen, and the only silver lining is that asset prices are inflated by the same low rates; cold comfort indeed.
One group that has certainly been affected by lower for longer is savers, particularly seniors who planned to finance their retirement with interest income generated by a life of working hard to build savings. I have heard from many Canadians who are rightly worried about their ability to live off their savings and who are seeking a return to higher interest rates.
I certainly can sympathize and understand these concerns. Demographic and economic changes, along with the low interest rates that followed the financial crisis, have upended the calculations that many Canadians made in planning for retirement. That is not their fault.
But at the heart of this discussion is the level of the real rate of interest. Having higher nominal interest rates because of higher inflation would not help savers, because higher inflation would just erode the future purchasing power of those savings. Maintaining a low-inflation environment is the Bank’s primary goal. We do this because we’ve seen that it is the best way to help bring about solid, sustainable economic growth. That growth benefits everyone, from business owners looking to expand, to workers looking for employment, to savers looking to protect their savings and find investment opportunities.
In our most recent Monetary Policy Report, in July, we said that our current policy rate setting of 0.5 per cent was consistent with the economy returning to full capacity toward the end of 2017 and inflation returning sustainably to its target. We’ll update our forecast next month, but in our decision on September 7, we indicated that the risks to our projected inflation profile have tilted somewhat to the downside following recent data on investment in both the United States and Canada, and the recent data on our exports. It is quite evident that our economy is still facing strong headwinds, and we need stimulative monetary policy to counteract them and move us closer to full capacity. We also need to watch the full effects of the government’s fiscal stimulus unfold.
However, the decline in the real neutral rate means that any given setting of our policy rate will be less stimulative today than it was a decade or two ago. The current policy rate, while certainly providing monetary stimulus, is not as stimulative as it would have been before the crisis.
By the same token, an immediate rise in our policy rate back to, for example, the 4.25 per cent that prevailed before the financial crisis would represent an extreme tightening of policy and would have significant consequences. This is just another way of saying that low interest rates are actually having big effects today, but the headwinds pushing back on that stimulus remain quite powerful.
For some savers, ultra-low interest rates do have positive effects. In particular, the value of most assets rises when interest rates decline, supporting gains in household wealth. This effect may not be as obvious as the impact of low rates on savings. But lower interest rates generally mean higher stock and bond prices, as well as increases in the value of real estate, which has been another important source of wealth for many savers, particularly seniors.
I realize this may be cold comfort to those people who have to adjust retirement plans to a lower-for-longer world. But the difficult reality is that savers must adjust their plans. That may mean some combination of putting aside more funds, working a little longer than planned or changing the mix of investments. There are no easy answers, particularly for some who have already retired.
Compounding the challenge is the fact that people are now living longer—life expectancy has risen by about 6 years since the early 1980s. I hope you will agree that this is unambiguously good news. But combining longer life expectancy with low interest rates means that a person starting to save today would have to set aside much more to generate the same retirement income as a person who began saving 25 years ago, if both wished to retire at the same age.
