Walter Bibico
Amid mixed economic prospects, the Bank of Canada will make its third interest rate decision this year.Robert Both, senior macro strategist at TD Securities, talks to MoneyTalk’s Greg Bonnell on economic conditions and the outlook for interest rates.
transcript
Greg Bonnell – Strong U.S. economic data has some investors questioning the timing of interest rate cuts in the southern United States. But how is the Canadian economy doing? What does this mean for the direction of interest rates in this country? Joining us now is Robert Both, senior macro strategist at TD Securities. Robert, it’s great to have you back on the show.
Robert Bos—— Thank you, Greg. It’s always nice to come back.
Greg Bonnell – all Yeah, so it’s always rates, rates, rates, but for good reason. I mean, we’re concerned about what central banks are going to do this year. We have expectations. As a result, the Bank of Canada will have a wealth of economic reports at its disposal. But luckily, we can look at them too. What do you see in them?
Robert Bos—— So I think at a very high level, the data over the last two or three months tells us that rate hikes are continuing to work. Since the last Bank of Canada meeting in March, we have received more data on inflation and wages, which suggests that underlying inflationary pressures continue to ease. The core inflation measure in February was slightly above the Bank of Canada’s target range of about 3.1% to 3.2%. These are the censored mean and weighted median, which they tend to give more weight to.
If you also look at wage growth over the past two months, we’re seeing some real slowdown. The labor market is slowly moving towards a more balanced situation. So while we continue to add jobs, accelerating population growth and labor force growth are helping the unemployment rate to be slightly higher, which should also take some pressure off future wage growth.
Now, at the same time, something is moving in the opposite direction. GDP growth over the past month or two does look a bit strong. This may cause some concern for banks.
The real estate market also showed some signs of recovery in December and January-February. This is something the banks will discuss in April. But I think from the top, they can sit here and say that rate hikes are still in play. We just have to give them a little more time to get to where they want to be.
Greg Bonnell – Preach the patience we receive from the Fed. We also get it from our central bank. Now, this week we also get the Bank of Canada’s business outlook survey. This is their own research. What does it tell us? What do you think the Bank of Canada thinks this means for the future of its policy?
Robert Bos—— correct. This is a very important report from the Bank of Canada. We don’t have a lot of private sector surveys that can provide a strong pulse on business conditions. But the quarterly business outlook survey does do a good job of capturing the broader sentiment level across the business community and provides additional insights into issues such as labor shortages, hiring conditions, investment intentions and more.
Its reach is indeed quite broad. Now, the first-quarter business outlook survey does tell us that, overall, businesses are less pessimistic than they were in the fourth quarter. As a result, fewer companies are planning or anticipating a recession or severe downturn in the coming year.
You look at those labor indicators, they’re starting to become more positive as well. Hiring intentions have shaken off their trough. Now, on the other hand, investment appetite has really dropped significantly. This is a concerning question, especially given the productivity headwinds we’ve seen over the past few years. From a more dovish perspective, more companies do expect inflation to return to the Bank of Canada’s target range over the next few years.
Now, one problem with all of this is that the Bank of Canada also surveyed consumers, and their inflation expectations haven’t moved that far from the first quarter. As a result, consumer inflation expectations remain well above pre-COVID-19 levels. The Bank of Canada survey told them that rising house prices and high food inflation are making it harder to normalize inflation expectations. While we have made great progress over the past 12 months, this will also make it more challenging to get inflation all the way back to target.
Greg Bonnell – Let’s talk about those challenges because consumer expectations are one thing. But I think what people are worried about is that if that’s what we expect for the path of inflation going forward, we’re going to start changing the way we behave and that’s going to make it very difficult for the Bank of Canada to get to where they want to be, as you said. . arrive, get.
Robert Bos—— correct. So, while headline inflation fell to 2.8%, it was still in the 1% to 3% range. Many Canadians are still struggling with the higher cost of living. This does appear in business outlook surveys as well. As a result, companies mentioned that while they expected output prices to fall, rising costs of living were adding to wage pressures. Wage growth is another obstacle to the continued return of inflation to 2%. So that’s going to be something they continue to monitor in the future.
Greg Bonnell – So, as you said, we’re seeing some signs in the economy that high borrowing costs are intended to slow the economy — some mixed signals. When banks put this together, they preached patience. When you preach patience, what does it actually mean — the big question we get from anyone watching this segment is, when is the rate cut coming?
Robert Bos—— Yes. So I think if you just look at inflation, you’ll see headline inflation fall back into the 1% to 3% range. You’ve seen that core inflation has also slowed on a three-month annualized basis, which can give you a sense of where core inflation is trending. The interest rate in these three months has been very close to 2%.
Now, what’s really difficult for the Bank of Canada is that they haven’t seen normalization in terms of expectations. Recently, we have begun to see more evidence that GDP growth will continue to strengthen in 2024. We got the January GDP data at the end of last week. The data showed the economy grew by 0.6% quarterly.
It was the largest monthly expansion in a year. According to the new forecast, Statistics Canada expects February growth to be 0.4%. That’s a small shift for near-term growth prospects. The Bank of Canada expects a sharply weaker January monetary policy report. The growth rate in the first quarter was 0.5%.
If February’s forecast holds true, first-quarter annualized growth would be close to 3%. Now we are in a dynamic where excess supply is no longer increasing. We may be approaching a return to a neutral output gap or a return to excess demand.
So if these signs of new growth momentum are not a one-off – if they indicate that perhaps the momentum is a sign of continuity, then there is some uncertainty as to whether we will be able to sustain the recent deceleration in CPI . A little stronger than we expected.
