[Chronique de Gérard Bérubé] Change of tone at the Bank of Canada

Should we believe or hope? It is possible to detect in the remarks used by the Bank of Canada that the 50 point increase in the key rate ordered on Wednesday would precede an additional increase — probably 25 points, at most 50 points — on December 7, which could be the last of this bullish cycle. Dreaming is cheap.

As a 75 basis point scenario spread its roots, the Bank of Canada opted instead for a 50 point hike in its target for the overnight rate, pushing it to 3.75%. We are talking about a sixth increase this year, a jump of 350 points in total since the rate of 0.25% in March. And it wouldn’t be over. “The Governing Council expects the key rate to rise further,” the Bank of Canada is careful to point out.

But the tone has become more conditional. With the impact of monetary austerity on economic activity lagging, « future rate hikes will be influenced by our assessments of: the effectiveness of monetary policy tightening in dampening demand, the resolution of supply, and the reaction of inflation and inflation expectations to rate hikes. And it is careful to recall that quantitative tightening, which consists of removing from its balance sheet the government bonds purchased during the health crisis, juxtaposes a complementary effect to increases in the key rate.

The rapid rise in the cost of money

The deterioration in economic activity caused by the rapid rise in the cost of money is gaining more and more bite. The Bank of Canada now expects GDP growth to decline from 3.25% to 0.9% next year, a pace halved from its July forecast of 1.8% for 2023. Globally, growth is projected to be just 1.5% next year, down from 3% in 2022. In the United States, it is expected to be near zero for most of 2023.

“The effects of recent policy rate hikes […] become apparent in sectors of the economy that are sensitive to interest rates: activity in the housing market has declined markedly, and household and business spending are moderating. In addition, the slowdown in international demand is starting to weigh on exports,” she writes.

She does not dare to name the word, but does not rule out a recession scenario. She sees GDP growth returning to around 1.5% in the third quarter only to decelerate further to between 0 and 0.5% through the end of 2022 and the first half of 2023. , for a few quarters, growth could just as easily be a little below zero as it could be slightly positive,” reads the Monetary Policy Report released Wednesday.

However, all is not behind us. “The economy remains in excess demand and labor markets remain tight,” the Bank said. To then predict that this excess demand “will give way to excess supply at the beginning of 2023”.

inflation remains

But the fact remains that the surge in prices clings stubbornly well beyond the targets, and that it remains widespread. Even though inflation as measured by the consumer price index (CPI) has fallen in the last three months, to 6.9%, two-thirds of the components of the CPI show an increase of more than 5 % over the past year.

On the grocery bill alone, Statistics Canada measured an 11.4% surge in prices for food purchased from stores in September, the steepest year-over-year rise since the 11.9% surge. of August 1981. In the CPI, of the 20 main components of the sub-index of food purchased from stores, more than four-fifths of the items are experiencing a price increase of more than 7%, adds the Bank of Canada.

As for borrowing costs, households who renew their loans face an increase greater than those observed in the cycles of monetary tightening of the last 30 years, she points out. Nothing less !

“High inflation is straining household budgets and putting many Canadian families in difficulty, as evidenced by rising housing costs and food prices. These costs represent approximately 40% of the expenditures covered by the CPI basket and, usually, a greater proportion of the expenditures of low-income households. »

The central bank laments that the measures of core inflation it favors do not yet signal a significant easing in underlying price pressures. And that short-term inflation expectations, which remain high, increase the risk that high inflation takes root. However, it expects the CPI to decline as supply and demand rebalance as rates rise. Also that price pressures caused by supply chain disruptions wane, that the past effects of strong commodity prices dissipate, and that the decline in agricultural commodity prices seen in the months will ease the pressure on food prices.

All this to say that it sees the rate of increase in the CPI falling to around 3% at the end of 2023, then a return to the target of 2% at the end of 2024.

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