Bank of Canada expected to hold interest rate next week, one year after aggressive cycle began
One year after the Bank of Canada’s aggressive rate hike cycle began, economists widely expect the central bank will stick to its plan of holding its key interest rate steady at its next scheduled announcement.
In making its rate decision next week, the central bank likely feels assured about its move to pause rate hikes, said Karyne Charbonneau, given recent economic data showing inflation is trending downward and the economy has slowed.
“They wouldn’t want to announce a pause and then immediately not go through with (it),” said Charbonneau, CIBC’s executive director of economics.
Since last March, the central bank has raised its key rate from near-zero to 4.5 per cent, the highest it’s been since 2007.
While announcing its eighth consecutive rate hike in January, the Bank of Canada said it would take a conditional pause to allow the economy time to react to higher borrowing costs.
It stressed the pause was conditional, however, making it clear that it’ll be ready to jump back in and raise interest rates further if the economy keeps running hot or inflation doesn’t come down quickly enough.
The central bank’s next rate decision is set for Wednesday.
The most recent inflation data suggests the country is inching closer to normal price growth. Canada’s annual inflation rate slowed to 5.9 per cent in January, down from the peak of 8.1 per cent reached in the summer.
And recent monthly trends show inflation is heading much closer to the Bank of Canada’s two per cent target.
Meanwhile, higher borrowing costs are weighing on economic activity.
RBC assistant chief economist Nathan Janzen said higher interest rates, which are meant to take the steam out of the economy by encouraging people and businesses to pull back on spending, will eventually squeeze households more noticeably.
“(There’s) still good reason to think that consumer spending will start to slow … as debt payments rise this year,” he said.
Statistics Canada’s latest GDP report shows the Canadian economy was treading water in the fourth quarter, posting zero growth, but beneath the disappointing data was resilient consumer spending keeping the economy afloat.
While that report showed a much grimmer economy than forecasters were expecting, a preliminary estimate from the federal agency showed that the economy bounced back in January, posting 0.3 per cent growth.
Given the Bank of Canada’s last rate hike was just over a month ago, Charbonneau said the full effects on the economy will be felt “much later this year.”
Perhaps the one worrying figure for the Bank of Canada was the strong employment numbers for January. The economy added a whopping 150,000 jobs in the first month of the year, keeping the unemployment level at a low five per cent.
And while a strong labour market is good news for workers, Bank of Canada governor Tiff Macklem has said repeatedly that the tightness in the labour market is a symptom of an overheated economy that’s fuelling inflation.
If demand falters, businesses facing lower sales will likely alter their hiring plans, causing a rise in unemployment.
Heading into next week’s rate decision, both Charbonneau and Janzen believe the Bank of Canada has done enough to merit the pause in rate hiking.
However, the central bank was in a very different place last March, facing harsh criticism for waiting too long to restrain rising inflation.
“A year ago, at this time, it was starting to become pretty clear that central banks were behind the curve in terms of interest rate hikes,” Janzen said.
The U.S. Federal Reserve has raised its benchmark lending rate to 4.5 per cent to 4.75 per cent from close to zero at the start of 2022.
After the latest U.S. inflation reading, the Fed is widely expected to raise its key rate to at least 5.25 per cent by June.
The Fed’s latest increase was a quarter of a percentage point, but one Fed board member has publicly suggested going back to hikes of half a percentage point.
At a news conference after the Fed’s meeting ended Feb. 1, Chairman Jerome Powell had stressed that inflation in the U.S., while still too high, was gradually cooling. He also suggested that it was still possible that the Fed could quell inflation without raising rates so high as to cause widespread layoffs and a deep recession.
In Canada, with interest rates now at a 16-year high, most economists anticipate a mild recession some time this year.
But despite these forecasts, Charbonneau said the risks are still tilted toward interest rates not being high enough, making rate hikes more likely than cuts for the foreseeable future.
With files from The Associated Press.
UK economy avoids recession but businesses still wary
LONDON, March 31 (Reuters) – Britain’s economy avoided a recession as it grew in the final months of 2022, according to official data which showed a boost to households’ finances from state energy bill subsidies but falling investment by businesses.
With the economy still hobbled by high inflation and worries about a weak growth outlook, gross domestic product (GDP) increased by 0.1% between October and December after a preliminary estimate of no growth.
GDP in the third quarter was also revised to show a 0.1% contraction, a smaller fall than initially thought, the Office for National Statistics (ONS) said on Friday.
Two consecutive quarters of contraction would have represented a recession.
Despite the improvement, British economic output remained 0.6% below its level of late 2019, the only G7 economy not to have recovered from the COVID-19 pandemic.
“The latest release takes the UK a little further away from the recessionary danger zone although the report does not change the overall picture that the economy’s performance was lacklustre over the second half of 2022 as the cost of living crisis hit hard,” Investec economist Philip Shaw said.
The International Monetary Fund forecast in January that Britain would be the only Group of Seven major advanced economy to shrink in 2023, in large part because of an inflation rate that remains above 10%.
Since then, a string of economic data has come in stronger than expected by analysts.
Ruth Gregory at Capital Economics said Friday’s figures showed high inflation had taken a slightly smaller toll than previously thought.
“But with around two-thirds of the drag on real activity from higher rates yet to be felt, we still think the economy will slip into a recession this year,” she said.
House prices slid in March at the fastest annual rate since the financial crisis, mortgage lender Nationwide said.
The Bank of England (BoE) last week raised interest rates for the 11th consecutive meeting and investors are split on the possibility of another increase in May.
Britain’s dominant services sector rose by 0.1%, boosted by a nearly 11% jump for travel agents, echoing other data which has pointed to a surge in demand for holidays.
Manufacturing grew by 0.5%, driven by the often erratic pharmaceutical sector, and construction grew by 1.3%.
Individuals’ savings were boosted by the government’s energy bill support scheme and households’ disposable income increased by 1.3% after four consecutive quarters of negative growth.
The BoE expects Britain’s economy to have contracted by 0.1% in the first three months of 2023 but it forecasts slight growth in the second quarter.
The outlook has improved thanks in large part to falling international energy prices and a strong jobs market.
But the picture could darken again if recent turmoil in the global banking sector leads to lenders reining in loans.
BUSINESS INVESTMENT FALLS
The data suggested businesses remained cautious. Business investment fell 0.2% in quarterly terms, a sharp downgrade from a first estimate of a 4.8% rise after changes to the way the ONS calculates seasonal adjustments.
Earlier on Friday, a survey painted a more upbeat picture for businesses.
Finance minister Jeremy Hunt this month announced new tax incentives to encourage companies to invest, although they were less generous than a previous scheme and came just as corporate tax is due to jump.
The ONS said Britain posted a shortfall in its current account in the fourth quarter of 2.5 billion pounds ($3.1 billion), or 0.4% of GDP.
Excluding volatile swings in precious metals, the shortfall fell to 3.3% of GDP from 4.2% in the third quarter.
The ONS said increased foreign earnings by companies, particularly in the energy sector, helped narrow the deficit.
Britain’s financial account surplus – which shows how the current account deficit was funded – comprised large net inflows of short-term, “hot” money. Foreign direct investment was negative in net terms for a sixth quarter running.
($1 = 0.8073 pounds)
Our Standards: The Thomson Reuters Trust Principles.
Canada’s economic growth resumed in January: StatCan
Statistics Canada says economic growth resumed in January following a small contraction in December.
The agency says real gross domestic product rose 0.5 per cent to start the year after contracting 0.1 per cent in the final month of 2022.
It also says that its initial estimate for February indicates growth continued with a gain of 0.3 per cent, though it cautioned the figure will be updated.
For January, the growth came as the wholesale trade, transportation and warehousing, and mining, quarrying and oil and gas extraction sectors all rebounded after falling in December.
Wholesale trade gained 1.8 per cent in January, helped by wholesalers of machinery, equipment and supplies, while the mining, quarrying and oil and gas extraction sector grew 1.1 per cent after falling 3.3 per cent in December.
The transportation and warehousing sector added 1.9 per cent in January, more than offsetting a drop of 1.1 per cent in December that was due in part to bad weather.
This report by The Canadian Press was first published March 31, 2023
China’s No. 2 leader says economy improved in March
BO’AO, China –
China’s new No. 2 leader said Thursday its economic recovery improved in March and tried to reassure foreign companies the country is committed to opening to the world.
Premier Li Qiang spoke before an international audience of businesspeople and politicians as the government tries to revive business and consumer confidence after anti-virus controls that isolated China were abruptly dropped in December.
The economy showed “encouraging momentum of rebounding” in January and February, Li said at the Boao Forum for Asia on the southern island of Hainan.
“The situation in March is even better,” Li said. He said consumption and investment picked up and “market expectations improved.”
Chinese retail sales rose 3.5% over a year earlier in January and February, recovering from December’s 1.8% contraction, government data showed earlier. Spending on restaurants rose 9.2%. Growth in investment in real estate and other fixed assets accelerated to 5.5% from December’s 5.1%.
Li’s audience included Prime Ministers Lee Hsien Loong of Singapore, Pedro Sanchez of Spain and Anwar Ibrahim of Malaysia and International Monetary Fund Managing Director Kristalina Georgieva.
A former Communist Party secretary for Shanghai, Li took office earlier this month in a once-a-decade change of government that installed loyalists of Chinese leader Xi Jinping to enforce his vision of tighter political control over the economy and society.
The premier sought to counter unease about growing state dominance in the economy and tension with the United States over security, technology and trade.
“No matter how the world situation may evolve, we will stay committed to reform, opening up and innovation-driven development,” Li said. “We welcome countries around the world to share in the opportunities and benefits that come with China’s development.”
Li called China a global “anchor of peace,” a statement that conflicts with the ruling Communist Party’s military buildup and menacing behavior toward Taiwan, Japan and other neighbours.
The military budget, the world’s second-largest after the United States, was increased this month for a 29th straight year. Xi’s government has stepped up efforts to intimidate Taiwan, which Beijing claims as part of its territory, by flying fighter jets and firing missiles into the sea near the self-ruled island democracy.
“To achieve greater success, chaos and conflict must not happen in Asia,” the premier said. “Otherwise, the future of Asia would be lost.”
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