There’s near-universal agreement that the Bank of Canada will hold its policy interest rate steady when it announces its next decision Wednesday morning. Just as it held steady six weeks ago. And seven weeks before that.
But not all holds are created equal. While the past two stand-pat rate decisions, in early September and again in late October, were dubbed “hawkish holds” by many economists, there’s talk that Wednesday’s announcement might be a bird of a different feather.
If you consider the economic data that the central bank has identified as its keys for determining whether it’s time to adjust rate policy, this doesn’t quite look like a “hawk” – a term that implies that the bank’s next rate move is more likely to be a raise than a cut. The bank has expressly signalled such a hawkish tilt in its past two hold-steady rate decisions, by including one short phrase in those rate announcements: “prepared to raise the policy rate further if needed.”
By the same token, it’s a tough sell to say that there has been enough change in the past six weeks for a “dovish hold” to have flown into the building – which would be signified by the bank starting to hint, even a little, about eventual rate cuts.
How far away is that flock of doves that Canadians have long been waiting for? Let’s dig through the economic data driving the Bank of Canada’s decision-making and see.
Inflation: In terms of the critical indicators, this, as always, is the bank’s legally mandated obsession. Yes, inflation has come down from 3.8 per cent to 3.1 per cent since the October rate decision, but that’s still too high for the bank, which has never wavered from its long-standing inflation target of 2 per cent. Bank of Canada Governor Tiff Macklem has said that the bank doesn’t need inflation to get all the way down to the target before it starts considering rate cuts, but 3.1 per cent is probably still too high to initiate that conversation in public.
Supply-demand balance: This is at the core of the bank’s assessment of whether inflation pressures are growing or dissipating – and, thus, central to gauging inflation’s future direction. In October, the bank estimated that the “output gap” – the difference between supply and demand in the economy – was “between -0.75 per cent and 0.25 per cent” as of the third quarter. Those figures mean that the gap is somewhere between a mild excess demand (which is inflationary), and a tiny bit of excess supply (disinflationary).
Since then, continued weak economic indicators – including two big ones last week, the contraction in third-quarter gross domestic product and the slight rise in November unemployment – suggest that the gap has probably moved more toward excess supply. Various signals of weak consumer demand have underlined that view. Nevertheless, we’re still likely only in mild oversupply at this stage.
The central bank has also specified a group of less high-profile economic gauges that it is tracking closely to assess whether nagging inflation pressures are breaking.
Core inflation: The central bank’s two favoured measures of core inflation – the underlying price pressures across the broad economy, after filtering out short-term noise – averaged 3.55 per cent in October, down from 3.75 per cent in September and 4 per cent in August. The trend is finally in the right direction, after core readings moved stubbornly sideways throughout the summer. Right direction, yes, but the level is still much too high.
Wage inflation: Despite the tepid job gains and higher unemployment rate in November, average year-over-year wage growth remained 4.8 per cent, unchanged from October. The Bank of Canada has said repeatedly that wage inflation in the 4-to-5-per-cent range – which has persisted all year – is “not consistent with achieving the 2-per-cent inflation target,” unless it is accompanied by similarly strong growth in productivity. That’s not happening; in fact, labour productivity has declined for five straight quarters.
Inflation expectations: The Bank of Canada’s most recent quarterly consumer survey showed that consumers’ inflation expectations for the next year are still far above historical norms, though they did inch down in the third quarter. However, that survey was released prior to the October rate decision; the bank has no new data to go on for Wednesday’s decision.
Corporate pricing behaviour: Again, the bank is working with old data, as its quarterly business outlook survey came out at the same time as the consumer survey. At that time (based on data collected in August and early September), companies continued to report larger and more frequent price changes than normal – over the past 12 months and in their expectations for the next 12 months. In the absence of new data, the bank will have to see this as a significant remaining obstacle to price stability.
There remain too many inconsistencies and holes in the data for a truly dovish bias to take wing. The conditions that the bank itself has laid out for eventual rate cuts have not been met yet.
Still, perhaps the bank has seen enough to remove that explicit hawkish position from its rate announcement. If “prepared to raise the policy rate further if needed” were to disappear from the statement, that would be major progress. And, realistically, about as much as we can hope, for now.
David Parkinson