The Bank of Canadarisks cutting short the current economic expansion if it shifts its focus from reducing slack in the economy to tamping down inflation, potentially setting the stage for the next cycle of rate cuts.
The dilemma for the central bank comes from a situation where inflation is driven not so much by economic strength but by factors, such as supply shortages, that are outside of its control and could lead to more enduring price increases if inflation expectations were to rise.
At a policy announcement last month, the BoC became the first central bank from a G7 country to exit quantitative easing and signaled it could begin hiking interest rates in April, three months earlier than previously thought.
“Investors are saying that the BoC will need to hike several times to deal with inflation,” said James Athey, investment director at Aberdeen Standard Investments in London. “Inflation is supply-side (driven), cost-push and transitory, thus hikes will come at a time of falling growth.”
Economic cycles can last from as short as a couple of years to more than a decade. The last expansion began after the global financial crisis in 2009, ending with the start of the COVID-19 pandemic last year.
The BoC had planned to let activity in the current cycle run hotter than usual in an effort to boost employment more than in past recoveries but its focus has now pivoted to moving inflation closer to its 2% target, analysts say.
Inflation was at 4.4% in September, the highest in nearly two decades.
Money markets expect a hike as soon as March and five in total next year, much more than is expected from the Federal Reserve. Tightening cycles tend to slow economic activity.
One clue that the market expects economic growth to slow is the shape of the yield curve. The gap between Canada‘s 2-year and 10-year yields has slumped from 130 basis points in favor of the longer-dated bond in March to as low as 54 basis points after the recent policy decision.
Typically, investors demand a higher yield for longer-term bonds unless they expect rates to fall. A negative spread, so-called curve inversion, would be seen as a recession warning.
“The repricing of the front-end has left the curve entering the coming hiking cycle flatter than it ever has been this far ahead of actual rate hikes,” said Ian Pollick, global head FICC strategy at CIBC Capital Markets.
“That raises the risk the curve will prematurely invert.”
The recovery could be boosted by Canadians spending some of their record cash hoardings built up during the pandemic.
But inflation is weighing on consumer confidence and the economy could be more sensitive to hikes than just a few years ago, after households ramped up borrowing to participate in a red-hot housing market.
“The market is a little pessimistic right now,” said Robert Robis, chief global fixed income strategist at BCA Research. It is betting that “any rate hike cycle will be short-lived and potentially reversed fairly quickly.
(Reporting by Fergal Smith; Editing by Bernadette Baum)
OTTAWA – The parliamentary budget officer says the federal government likely failed to keep its deficit below its promised $40 billion cap in the last fiscal year.
However the PBO also projects in its latest economic and fiscal outlook today that weak economic growth this year will begin to rebound in 2025.
The budget watchdog estimates in its report that the federal government posted a $46.8 billion deficit for the 2023-24 fiscal year.
Finance Minister Chrystia Freeland pledged a year ago to keep the deficit capped at $40 billion and in her spring budget said the deficit for 2023-24 stayed in line with that promise.
The final tally of the last year’s deficit will be confirmed when the government publishes its annual public accounts report this fall.
The PBO says economic growth will remain tepid this year but will rebound in 2025 as the Bank of Canada’s interest rate cuts stimulate spending and business investment.
This report by The Canadian Press was first published Oct. 17, 2024.
OTTAWA – Statistics Canada says the level of food insecurity increased in 2022 as inflation hit peak levels.
In a report using data from the Canadian community health survey, the agency says 15.6 per cent of households experienced some level of food insecurity in 2022 after being relatively stable from 2017 to 2021.
The reading was up from 9.6 per cent in 2017 and 11.6 per cent in 2018.
Statistics Canada says the prevalence of household food insecurity was slightly lower and stable during the pandemic years as it fell to 8.5 per cent in the fall of 2020 and 9.1 per cent in 2021.
In addition to an increase in the prevalence of food insecurity in 2022, the agency says there was an increase in the severity as more households reported moderate or severe food insecurity.
It also noted an increase in the number of Canadians living in moderately or severely food insecure households was also seen in the Canadian income survey data collected in the first half of 2023.
This report by The Canadian Press was first published Oct 16, 2024.
OTTAWA – Statistics Canada says manufacturing sales in August fell to their lowest level since January 2022 as sales in the primary metal and petroleum and coal product subsectors fell.
The agency says manufacturing sales fell 1.3 per cent to $69.4 billion in August, after rising 1.1 per cent in July.
The drop came as sales in the primary metal subsector dropped 6.4 per cent to $5.3 billion in August, on lower prices and lower volumes.
Sales in the petroleum and coal product subsector fell 3.7 per cent to $7.8 billion in August on lower prices.
Meanwhile, sales of aerospace products and parts rose 7.3 per cent to $2.7 billion in August and wood product sales increased 3.8 per cent to $3.1 billion.
Overall manufacturing sales in constant dollars fell 0.8 per cent in August.
This report by The Canadian Press was first published Oct. 16, 2024.
