Since the Bank of Canada last hiked rates in July, the next two decisions to hold pat were made when there was still heightened concern over a re-acceleration in inflation. Today’s meeting was the third consecutive time the overnight target was left at its 22-year high of 5%, but rather than this being another pause before a possible hike, I would say this is the first pause before a probable rate cut.

 

The BoC cited a number of reasons supporting the no-change verdict. For one, Bank economists no longer see the Canadian economy in a state of excess demand, meaning that the cumulative tightening in policy since the Spring of 2022 has finally started to bear fruit. The 1.1% contraction in real GDP in the third quarter definitely helped create some slack. The Bank also acknowledged the moderation in employment and how growth in payrolls is not keeping up with labour force growth – hence creating the rise in the unemployment rate. While the Bank still sees a risk to the outlook for inflation, this is a different spin than what we heard in the October meeting, when the statement said inflation risks had increased. Still, it maintains the language that it is prepared to hike again if the inflation picture gets worse.

 

 

 

It was imperative that the Bank keep this language in the statement, as it does not want the market to get carried away with pricing in rate cuts in 2024. December 2024 BA futures have rallied more than 100 basis points since the end of September and are close to pricing in four quarter-point declines next year. The 3-month moving average for the monthly change in core CPI has now dipped below 0.2% for the first time since March 2021 and if the downward trend is sustained, it will point to a 2% y/y print at some point in 2024.

 

Without a change in rates, this would mean a real overnight target rate of 3%, which takes us to the most restrictive levels since before the Great Financial Crisis. Bank officials will be acutely aware of this and at some point, the pivot in the language will have to take place. We think that occurs in the first quarter, with actual cuts potentially starting by the middle of the year.

 

On behalf of the Pyle Wealth Advisory team, have a wonderful rest of the week.   

Andrew Pyle

 

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Andrew Pyle is an Investment Advisor with CIBC Wood Gundy in Peterborough Ontario. The views of  Andrew Pyle and Pyle Wealth Advisory and may not necessarily reflect those of CIBC World Markets Inc.