The Bank of Canada keeps its key policy rate unchanged at 4.5%, as the central bank continues to monitor the impact of its previous rate hikes on the economy. Anthony Okolie speaks with Andrew Hencic, Senior Economist, TD, about the implications for inflation and economic growth.
ANDREW HENCIC: Well, the decision, basically, came in as expected. There is a little bit of an upgraded view for growth for 2023, but the BOC is committed to this wait and see approach, taking rates to 4.5% and waiting to see what the total impact will be. Interestingly, in the statement, they highlighted that inflation projections suggest that inflation is going to come back down to about 3% around mid-year. The one tidbit that did stand out is towards the end of the statement. They highlighted some of the concerns about getting it the rest of the way down to 2%, but broadly speaking, they may play out as expected.
ANTHONY OKOLIE: And do you think the Bank of Canada is done rate hikes for this year, particularly after that impressive jobs report?
ANDREW HENCIC: Our view is that, yes, they are. Inflation is trending in the right direction. We see slowing global demand growth, and these things should weigh on the economy. So we see the policy rate at 4.5% through the end of the year as inflation continues to moderate before rate cuts come in. Now, as I did mention, the language in the statement does highlight that there is some upside risk here to inflation. They talk about state inflation, expectations, pricing behavior, service sector inflation, so there is a chance of an upside surprise and that they need to do more. But our view is that the policy rate is going to stay at 4.5%.
ANTHONY OKOLIE: OK, so with the Bank of Canada pausing, staying at 4.5%, of course, in the US, markets are pricing in additional Fed rate hikes. Where does this leave Bank of Canada monetary policy?
ANDREW HENCIC: Well, you know, our view is that the Fed has one more hike left in them coming likely in May. But if you look at it from the Bank of Canada's perspective, things continue to trend in the right direction. Their core measures on a three-month basis. The median is running at about 3.8%.
The trim measures are running about 3.3%. These things suggest that underlying inflation pressures are coming off, and they're going to trend lower on a year-on-year basis. Now, this is still above the 2% target, but they're moving towards the top end of that acceptable range. So our view is that the hold is still on, but that things are evolving in a way that the Bank of Canada will appreciate.
ANTHONY OKOLIE: OK, you mentioned that the Fed might hike one more time. Given this gap in policy rates between the Fed and the Bank of Canada, what impact do you think this will have on the loonie going forward?
ANDREW HENCIC: So like I mentioned, we see the Fed raising rates one more time this year. Now, we've seen the dollar strengthened, the US dollar, I should say, strengthen this year as the expectations for the tighter monetary policy and some growth jitters kind of helped it run up there earlier in the year. Now, some of that is coming off.
The loonie has stopped losing ground. Importantly, markets are pricing for a couple of Fed cuts later this year and, realistically, only one cut for the Bank of Canada. So our view is that we're going to be looking for a CAD somewhere in the range of about $0.73 through the back half of the year.
ANTHONY OKOLIE: OK, now aside from inflation and recession worries, what do you think are the biggest risks right now to the Bank of Canada's outlook?
ANDREW HENCIC: Well, if you're the BOC, you're going to be worried about some of the jitters in the financial sector. They seem to be pretty confident that they will be able to address anything that comes from there, but there is the impact to aggregate demand and that a rapid slowdown in the US could feed over to Canada as well. Like we also mentioned, if the data keeps coming in stronger than expected, inflation could be a little bit stickier, and this is going to be a little more worrisome for the bank.
We've seen the core measures, like I said, come down to around 3% on the three-month rate, which suggests that the year on year measures are going to keep coming down. But the bank really needs to see this trend continue. They're going to be looking at this job market. It's really showing little signs of slowing down and be slightly worried that more will be needed from them to use price pressures.
ANTHONY OKOLIE: Andrew, thank you very much for your time.
ANDREW HENCIC: Thank you very much for having me.