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The Bank of Canada is set to give its third interest rate decision of the year at a time when the economy is facing a mixed outlook. Robert Both, Senior Macro Strategist with TD Securities, speaks with MoneyTalk’s Greg Bonnell about the state of the economy and the outlook for rates.
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[AUDIO LOGO]
Strong run of economic data in the US has some investors questioning the timing of rate cuts south of the border. But how does the Canadian economy stack up? And what could that mean for the path of interest rates in this country? Joining us now to discuss is Robert Both, senior macro strategist with TD Securities. Robert, great to have you back on the show.
Thank you, Greg. Always a pleasure to be back.
All right, so it's always interest rates, interest rates, interest rates, but for good reason. I mean, we're concerned about what the central bank is going to get up to this year. We had expectations. So the Bank of Canada will have a bunch of economic reports under its arm. But luckily, we can look at them as well. What are you seeing in them?
So I think from a very high level, what the data has told us over the last two or three months is that rate hikes are continuing to work. Since the last Bank of Canada meeting in March, we've received more data on inflation, on wages that speaks to underlying inflation pressures continuing to moderate. Core inflation measures in the month of February were just sitting above the Bank of Canada's target range, about 3.1% to 3.2%. Those are the trimmed mean and the weighted median that they tend to put a little more weight on.
And if you look at the last two months of wage growth as well, we've seen some material slowdowns there. Labor markets are slowly moving towards more balanced conditions. So even though we've continued to add jobs, the faster rate of population growth and faster rate of labor force growth is helping to bring that unemployment rate a little bit higher, which should take some pressure off wage growth going forward as well.
Now, at the same time, there are some things that are moving in the opposite direction. The last month or two of GDP growth does look like it's coming in a little bit stronger. That might give the bank some cause for concern.
The housing market as well is showing some signs of life over December and January into February. That is something the bank is going to be discussing in April. But I think from a high level, they can sit back here and say that rate hikes are still working. We just need to give them a little bit more time to get to where they're trying to go.
Preaching that patience, which we're getting from the Fed. We're getting from our central bank as well. Now, this week, we also got the Bank of Canada's business outlook survey. This is their own research. What did it tell us? And what do you think the Bank of Canada will think it means for the future of their policy?
Right. So this is a pretty important report from the Bank of Canada. We don't have a ton of private sector surveys that give a strong pulse on business conditions. But that quarterly business outlook survey does do a nice job of capturing the broader sentiment level across the business community and also giving a little more insight to things like labor shortages, hiring conditions, investment intentions.
It's really quite broad reaching. Now, what that Q1 business outlook survey did tell us was that, at a high level, firms are a little less downbeat than they were in the fourth quarter. So there are fewer firms that are planning or anticipating a recession or a severe downturn over the coming year.
You look at those labor indicators, those are starting to turn a little more positive as well. The hiring intentions have moved off their low. Now, on the flip side, investment intentions did fall quite sharply. That is a concern, especially given the productivity headwinds that we've seen over the last couple of years. And on a more dovish note as well, there were more companies that do expect inflation to return to the Bank of Canada's target range over the next couple of years.
Now, the one wrinkle to all of this is that the Bank of Canada also surveys consumers, and their inflation expectations didn't see nearly as much progress over the first quarter. So consumer inflation expectations are still well above those pre-COVID levels. The Bank of Canada's surveys are telling them that those stickier shelter prices, high food inflation-- this is all making it more difficult for inflation expectations to normalize. And that also is going to make it a little more challenging to get inflation all the way back to target, even though we've come a long way over the last 12 months.
Let's talk about those challenges because the expectations among consumers are one thing. But I guess the fear there is that if these are how our expectations for the future path of inflation, we start to change our behaviors in ways that will make it, as you said, tough for the Bank of Canada to get to where they want to get to.
Right. So even though headline inflation is down to 2.8%, it's inside that 1% to 3% range. A lot of Canadians are still struggling with a higher cost of living. That did show up in the business outlook survey as well. So firms were mentioning how even though they expect output prices to fall, just that higher cost of living is keeping wage pressures a little stronger.
And that wage growth is another obstacle to the sustained return to a 2% inflation rate. So that is going to be something that they continue to monitor going forward.
So we're seeing some signs in the economy, as you said, that the high cost of borrowing, intentionally, is slowing things down-- some mixed signals. When the bank puts it together, they're preaching patience. When you preach patience, what does it actually mean for-- the big question we'll get from anyone watching this segment is, when are the rate cuts coming?
Yeah. So I think if you were to just focus solely on the inflation picture, you've seen headline inflation fall back into that 1% to 3% range. You've seen core inflation slow as well on a three-month annualized basis, which kind of gives you a bit of an indication of where core inflation is trending. Those three-month rates are already much closer to 2%.
Now, the real difficult part for the Bank of Canada is they haven't seen that normalization on the expectations front. And more recently as well, we are starting to see more evidence of GDP growth strengthening into 2024 as well. So we got the January GDP figures at the end of last week. Those showed the economy expanding by 0.6% month-over-month.
That was the largest single month expansion in a year's time. And with new projections as well, Statistics Canada is looking for a 0.4% increase in February. That is a bit of a shift for the near-term growth outlook. The Bank of Canada was anticipating something considerably weaker in its January monetary policy report. They had Q1 growth at 0.5%.
If that February estimate is realized, that would put Q1 tracking closer to 3% annualized. And now we're in a dynamic where we're no longer adding to excess supply. We might be moving closer to getting back to a neutral output gap or moving back into excess demand.
So there's a little bit of uncertainty about whether we're going to be able to sustain these recent decelerations in CPI if these signs of renewed growth momentum are not a one-off-- if they're a sign that, perhaps, momentum is a little stronger than we'd anticipated. [AUDIO LOGO]
[MUSIC PLAYING]
Strong run of economic data in the US has some investors questioning the timing of rate cuts south of the border. But how does the Canadian economy stack up? And what could that mean for the path of interest rates in this country? Joining us now to discuss is Robert Both, senior macro strategist with TD Securities. Robert, great to have you back on the show.
Thank you, Greg. Always a pleasure to be back.
All right, so it's always interest rates, interest rates, interest rates, but for good reason. I mean, we're concerned about what the central bank is going to get up to this year. We had expectations. So the Bank of Canada will have a bunch of economic reports under its arm. But luckily, we can look at them as well. What are you seeing in them?
So I think from a very high level, what the data has told us over the last two or three months is that rate hikes are continuing to work. Since the last Bank of Canada meeting in March, we've received more data on inflation, on wages that speaks to underlying inflation pressures continuing to moderate. Core inflation measures in the month of February were just sitting above the Bank of Canada's target range, about 3.1% to 3.2%. Those are the trimmed mean and the weighted median that they tend to put a little more weight on.
And if you look at the last two months of wage growth as well, we've seen some material slowdowns there. Labor markets are slowly moving towards more balanced conditions. So even though we've continued to add jobs, the faster rate of population growth and faster rate of labor force growth is helping to bring that unemployment rate a little bit higher, which should take some pressure off wage growth going forward as well.
Now, at the same time, there are some things that are moving in the opposite direction. The last month or two of GDP growth does look like it's coming in a little bit stronger. That might give the bank some cause for concern.
The housing market as well is showing some signs of life over December and January into February. That is something the bank is going to be discussing in April. But I think from a high level, they can sit back here and say that rate hikes are still working. We just need to give them a little bit more time to get to where they're trying to go.
Preaching that patience, which we're getting from the Fed. We're getting from our central bank as well. Now, this week, we also got the Bank of Canada's business outlook survey. This is their own research. What did it tell us? And what do you think the Bank of Canada will think it means for the future of their policy?
Right. So this is a pretty important report from the Bank of Canada. We don't have a ton of private sector surveys that give a strong pulse on business conditions. But that quarterly business outlook survey does do a nice job of capturing the broader sentiment level across the business community and also giving a little more insight to things like labor shortages, hiring conditions, investment intentions.
It's really quite broad reaching. Now, what that Q1 business outlook survey did tell us was that, at a high level, firms are a little less downbeat than they were in the fourth quarter. So there are fewer firms that are planning or anticipating a recession or a severe downturn over the coming year.
You look at those labor indicators, those are starting to turn a little more positive as well. The hiring intentions have moved off their low. Now, on the flip side, investment intentions did fall quite sharply. That is a concern, especially given the productivity headwinds that we've seen over the last couple of years. And on a more dovish note as well, there were more companies that do expect inflation to return to the Bank of Canada's target range over the next couple of years.
Now, the one wrinkle to all of this is that the Bank of Canada also surveys consumers, and their inflation expectations didn't see nearly as much progress over the first quarter. So consumer inflation expectations are still well above those pre-COVID levels. The Bank of Canada's surveys are telling them that those stickier shelter prices, high food inflation-- this is all making it more difficult for inflation expectations to normalize. And that also is going to make it a little more challenging to get inflation all the way back to target, even though we've come a long way over the last 12 months.
Let's talk about those challenges because the expectations among consumers are one thing. But I guess the fear there is that if these are how our expectations for the future path of inflation, we start to change our behaviors in ways that will make it, as you said, tough for the Bank of Canada to get to where they want to get to.
Right. So even though headline inflation is down to 2.8%, it's inside that 1% to 3% range. A lot of Canadians are still struggling with a higher cost of living. That did show up in the business outlook survey as well. So firms were mentioning how even though they expect output prices to fall, just that higher cost of living is keeping wage pressures a little stronger.
And that wage growth is another obstacle to the sustained return to a 2% inflation rate. So that is going to be something that they continue to monitor going forward.
So we're seeing some signs in the economy, as you said, that the high cost of borrowing, intentionally, is slowing things down-- some mixed signals. When the bank puts it together, they're preaching patience. When you preach patience, what does it actually mean for-- the big question we'll get from anyone watching this segment is, when are the rate cuts coming?
Yeah. So I think if you were to just focus solely on the inflation picture, you've seen headline inflation fall back into that 1% to 3% range. You've seen core inflation slow as well on a three-month annualized basis, which kind of gives you a bit of an indication of where core inflation is trending. Those three-month rates are already much closer to 2%.
Now, the real difficult part for the Bank of Canada is they haven't seen that normalization on the expectations front. And more recently as well, we are starting to see more evidence of GDP growth strengthening into 2024 as well. So we got the January GDP figures at the end of last week. Those showed the economy expanding by 0.6% month-over-month.
That was the largest single month expansion in a year's time. And with new projections as well, Statistics Canada is looking for a 0.4% increase in February. That is a bit of a shift for the near-term growth outlook. The Bank of Canada was anticipating something considerably weaker in its January monetary policy report. They had Q1 growth at 0.5%.
If that February estimate is realized, that would put Q1 tracking closer to 3% annualized. And now we're in a dynamic where we're no longer adding to excess supply. We might be moving closer to getting back to a neutral output gap or moving back into excess demand.
So there's a little bit of uncertainty about whether we're going to be able to sustain these recent decelerations in CPI if these signs of renewed growth momentum are not a one-off-- if they're a sign that, perhaps, momentum is a little stronger than we'd anticipated. [AUDIO LOGO]
[MUSIC PLAYING]
