It’s becoming clearer by the day that even in economies where rate increases should be highly efficient at curbing economic activity, inflation is difficult to dislodge once it becomes entrenched. (Who knew, right?)
The Bank of Canada resumed its rate-hiking campaign on Wednesday after a two-meeting pause, underscoring the message from Tuesday’s RBA hike.
Investors can’t assume a pause is everywhere and always synonymous with the end of tightening. Indeed, evidence from 2023’s “hold” meetings suggests precisely the opposite: Pauses are just breaks. Or “skips,” as some Fed officials have described a prospective hawkish hold at the June FOMC meeting.
Wednesday’s move in Canada was the ninth hike of the cycle. You’re reminded that the BoC did roll out the full-point bazooka last year, a decision which briefly stoked speculation the Fed might likewise go for 100bps at a single policy gathering.
“Underlying inflation remains stubbornly high,” the BoC said, in the course of recapping recent developments in the Canadian economy, where consumption growth is “surprisingly strong and broad-based,” services demand is rebounding and “spending on interest-sensitive goods” is picking up again, along with housing market activity.
As a quick reminder, inflation in Canada rose in April for the first time in 10 months. If you squint, you can see the uptick in the visual below.
Headline price growth is just half of the peak seen last summer, but still nowhere near the target band.
Importantly, the language in the new BoC statement described a developing situation, which may or may not abate without additional tightening. The bank was clear on one thing: Policy wasn’t sufficiently restrictive prior to Wednesday’s increase. The statement said as much explicitly.
The forward guidance was open to interpretation. The bank will “continue to assess the dynamics” to determine if “the evolution” of macro variables is consistent with returning inflation to target.
Somewhat disconcertingly, the BoC said the persistence of elevated readings on three-month core inflation measures, as well as ongoing evidence of excess demand, together “increase concerns that CPI inflation could get stuck materially above the 2% target.”
At least they’re honest.
BoC is also reducing its balance sheet much faster than Fed, by letting bond holdings mature with no effort to cap QT with offsetting purchases. Total BoC assets -35% since Mar 2021 peak.
https://www.bankofcanada.ca/rates/banking-and-financial-statistics/bank-of-canada-assets-and-liabilities-weekly-formerly-b2/