The Bank of Canada Un-Pauses, Hikes 25 Basis Points, Second Central Bank to Un-Pause on Resurging Inflation Fears
by Wolf Richter • Jun 7, 2023
More rate hikes are on the table. “Overall, excess demand in the economy looks to be more persistent than anticipated.”
By Wolf Richter for WOLF STREET.
The Bank of Canada un-paused today, after having “paused” following the January hike. The pause had been widely ballyhooed as the end of the rate hikes and a pivot toward rate cuts. Those hopes have now been bitterly disappointed. Everyone is figuring out that this inflation isn’t just fading away on its own.
Today it hiked its policy rates again by 25 basis points, bringing its overnight rate to 4.75%, the highest in 22 years, in a move that surprised a lot of observers.
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The Bank of Canada has now become the second central bank to pause and then un-pause, after the Reserve Bank of Australia, which had paused in April and un-paused in May, and hiked for the second time post-pause yesterday, on fears that inflation was getting entrenched via inflation expectations and surging labor costs that weren’t matched by productivity gains.
At its meeting in January, when the Bank of Canada hiked one more time and announced the pause, it stressed that it was a wait-and-see pause, not a pivot, though that message had been widely ignored. At the time, BOC Governor Tiff Macklem said in an interview, “The question really we’re asking ourselves is, ‘Have we done enough?’ We’re pausing to assess whether we’ve done enough.”
Turns out, it has not “done enough.”
The rate hike today reflects “our view that monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target,” it said in the statement today.
So, well, turns out, amid strong consumer spending, a tight labor market, and increased activity in the housing market, the Bank of Canada has not done enough. And it un-paused the ballyhooed pause.
The BOC pointed out that the “stubbornly high” underlying inflation rose for the first time in 10 months. The increases were broad-based across goods and services, “reflecting strong demand and a tight labor market,” it said in the statement.
The BOC is now seriously fretting about the resurgence of underlying inflation:
- “Overall, excess demand in the economy looks to be more persistent than anticipated.
- “The economy was stronger than expected” in Q1 with GDP growth of 3.1%
- “Consumption growth was surprisingly strong and broad-based, even after accounting for the boost from population gains.”
- “Demand for services continued to rebound.”
- “Spending on interest-sensitive goods increased and, more recently, housing market activity has picked up.”
- “The labor market remains tight: higher immigration and participation rates are expanding the supply of workers but new workers have been quickly hired, reflecting continued strong demand for labor.”
And it warned that “with three-month measures of core inflation running in the 3.5-4% range for several months and excess demand persisting, concerns have increased that CPI inflation could get stuck materially above the 2% target.”
And the BOC put the possibility of more rate hikes on the table. It said, “We will be evaluating whether the evolution of excess demand, inflation expectations, wage growth, and corporate pricing behavior are consistent with achieving the inflation target.”
Yields jump on the move.
The Canadian bond market was surprised by the move and is now adjusting to it. The one-year yield jumped by 17 basis points to 5.13% today, now expecting one more rate hike and no rate cuts within the 12-month period:
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Quantitative tightening will continue.
“Quantitative tightening is complementing the restrictive stance of monetary policy and normalizing the Bank’s balance sheet,” it said.
During its crazed QE starting in March 2020 through March 2021, the BOC piled on an additional C$455 billion in assets. As of the most recent balance sheet, it has now shed 46% of these pandemic QE assets, well ahead of the Fed and other central banks — though it’s behind the Fed on rate hikes, perhaps on the theory of faster QT and slower rate hikes.
It started early by starting to unload its repos and Treasury bills in 2020. It never seriously bought mortgage bonds and then stopped buying them altogether in late 2020. And it unwound most of its other small holdings.
Its largest remaining holdings today are Government of Canada (GoC) bonds: at C$313 billion they’re down by 27.4% (red) from the peak. The “Indemnity” reflects unrealized losses on its bond holdings, currently C$28 billion (brown), which it carries as an asset under an indemnity agreement with the Government of Canada, that, if it actually ever sold those bonds, rather than hold them to maturity, and thereby realized the losses, the government would indemnify the BOC for those losses.
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21 comments for “The Bank of Canada Un-Pauses, Hikes 25 Basis Points, Second Central Bank to Un-Pause on Resurging Inflation Fears”
- nov22
Jun 7, 2023 at 1:00 pm
Nobody talks about business investment anymore under the current interest rate environment. I wonder how bad it is now. BTW, commercial real estate vacancy rate is 15% in downtown Toronto.
Reply - rodolfo
Jun 7, 2023 at 1:00 pm
Well does the fed have the guts to follow this one?
Reply- Juliab
Jun 7, 2023 at 1:17 pm
It depends on the movement of US inflation. Why not follow BoC? !
Reply - Occam
Jun 7, 2023 at 1:24 pm
25 basis points more would put US monetary policy at either mildly stimulative or around neutral, depending on which inflation index you use. Meanwhile, fiscal policy remains highly stimulative long term. Fifty basis points plus a statement that there will be no pause or skip until inflation hits the 2% target would convince Wall Street that the Fed wasn’t going to tolerate 4% inflation. However, the Fed will tolerate higher inflation because abusing the currency is the political and societal choice that has been made, and the Fed is part of government and society.
Reply- jon
Jun 7, 2023 at 1:32 pm
I’d rewrite this: “Abusing the currency is the political and societal choice that has been made, and the Fed is part of government and society.”
as
Abusing the currency is the choice which helps the elites and rich , that has been made, and the Fed does not work for common people but for its masters .
I don’t see FED being hawkish either in their action or their words.
Reply
- jon
- Random Intime
Jun 7, 2023 at 1:43 pm
For Fed balance sheet size is the problem. They should prioritize reducing it rather than rates.
Reply
- Juliab
- rodolfo
Jun 7, 2023 at 1:11 pm
And it warned that, “with three-month measures of core inflation running in the 3.5-4% range for several months and excess demand persisting, concerns have increased that CPI inflation could get stuck materially above the 2% target.”
Just like Wolf has been calling it for months
Reply - Mark
Jun 7, 2023 at 1:22 pm
“Overall, excess demand in the economy looks to be more persistent than anticipated.”
Translation:
“It’s amazing how much counterfeit currency we actually brought into existence.”
Reply - Flaming Anarchist
Jun 7, 2023 at 1:30 pm
Real estate prices started climbing in Canada again, in my hometown Nelson BC $500k for something I couldn’t live in on a busy street. Everywhere you go people are spending like crazy. 50% of adjustable rate mortgages have hit the trigger point with 100% + of the payment going to interest. The Trudeau Government passed emergency legislation to extend amortizations. Some have seen them increase to 70-90 years. We have another 2008 brewing, this time Canada will feel the pain.
Reply- TEMPLE
Jun 7, 2023 at 2:49 pm
I have family in Nelson and likewise watch the market there, and I am as shocked by what I see in that tiny little middle-of-nowhere town as I am with what I see here in Nanaimo (a town that anything bad you can say about it…is basically the truth).
Prices are down here about 15% here from the peak madness (early January 2022 in The ‘Mo), but that represents a sizeable bounce off the -25% pricing of January 2023. Sales are off by quite a bit, too, and anything over a million just rots on the market, but the idea of million dollar non-waterfront houses in Nanaimo would have been laughable five years ago. It’s still laughable, but it has become reality. It’s not really a robust market, unlike what real estate agents are saying, but there’s sure a long way to go until we get back anywhere close to actual affordability.
TEMPLE
Reply- Maximus Minimus
Jun 7, 2023 at 3:04 pm
Not sure if you can comment on the situation north of Nanaimo, Parksville to Courtenay?
Reply
- Maximus Minimus
- Maximus Minimus
Jun 7, 2023 at 3:03 pm
Not until the loonies currently in charge are replaced.
Reply
- TEMPLE
- Pol Pothead
Jun 7, 2023 at 1:36 pm
Wolf, can you comment on the argument that the #1 upward contributor to CPI (28.5% YOY) are mortgage interest costs from variable-rate mortgages (and rolling renewals of fixed-terms) adjusting to the rising benchmark rates? Don’t the hikes statistically exacerbate, not relieve, this surge?
Reply- Wolf Richter
Jun 7, 2023 at 2:04 pm
If that’s what you believe, you need to argue that with the BOC, not with me.
The BOC said the opposite of what you say. It’s cited in the article. Read the article!
Reply
- Wolf Richter
- Anonymous
Jun 7, 2023 at 1:48 pm
I’ve grown weary of this trickle of rate increases. Inflation is going to rage past 2024. Currency is going to be devalued significantly and everyone is getting significantly poorer.
The fed and government is going to drag out the inflation past the general election and then we may have a deflation/stagflation, whatever. I don’t see this changing until 2024 or later…
Reply- OutWest
Jun 7, 2023 at 2:10 pm
“Currency is going to be devalued significantly and everyone is getting significantly poorer.”
From what I observe, the wealthiest 20% or so of citizen’s are able to manage inflation in a way that actually increases their wealth. Tax policies help ensure that they prosper under most scenarios.
Reply
- OutWest
- Mr. Market
Jun 7, 2023 at 1:56 pm
– The charts remain in agreement. The FED could hike the next time but the charts are also predicting that rate cuts are coming.