Bank of Canada Governor Tiff Macklem has demonstrated a preference in the past to institute shifts in policy direction via a series of gradual steps.Sean Kilpatrick/CP
In a handful of words Wednesday, the Bank of Canada signalled that it is about to end one of the most tumultuous interest-rate-hiking cycles in the central bank’s history.
The only thing it left out is precisely when.
In the final paragraph of a five-paragraph statement announcing the bank’s decision to raise its key rate by another half a percentage point, to 4.25 per cent, the bank said that its Governing Council “will be considering whether the policy interest rate needs to rise further.”
In the previous rate announcement in October, the bank said that Governing Council “expects that the policy interest rate will need to rise further.” Indeed, “will need to rise further” has been the bank’s operative phrase in every rate decision since it began raising rates last March.
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It’s a small change in words, but the meaning is big. This is the Bank of Canada declaring that, after seven straight rate hikes that added a full four percentage points to the policy rate in just nine months, it is prepared to stop. It’s the first time the bank has signalled an impending change in policy direction since last January, when it indicated that it was ready to start raising rates.
Still, there was equivocation built into the wording. The bank has thrown open the exit; it’s not saying when it’s going to walk through.
There are a few ways to interpret that. One would be to say that the Bank of Canada wants to leave its options open – buy itself more time, and more economic data, to be convinced that the rate hikes it already has in place are dampening demand and inflation as intended. Or maybe the bank is saying that it now sees the need for at least one more rate hike as more of a coin toss, rather than the slam dunk that it was until now.
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But another possibility is that the bank has already decided to end its rate hikes, and wanted to use Wednesday’s statement to give the markets and the Canadian public clear and ample warning. That would be consistent with Governor Tiff Macklem’s demonstrated preference in the past to institute shifts in policy direction via a series of gradual steps.
By that same logic, though, the bank might still have one more rate hike left in it.
Consider that the bank raised its key rate by a full percentage point in July, three-quarters of a point in September, and a half-point in October and again in December. If Mr. Macklem wants to continue those baby steps toward a halt, the next obvious step would be to trim the increase to one-quarter of a point at the next decision in January – and at that time, declare that the bank is on hold.
Of course, past preferences of central bankers do not guarantee their future path. Mr. Macklem’s slow-and-deliberate approach to starting the rate-hiking cycle was, in retrospect, too slow to have kept pace with surging inflation pressures, leaving the bank scrambling to catch up. Perhaps the Governor will be more willing to skip a step in favour of a judicious leap, should the economic data justify.
To that end, the rate announcement shed some light – but, not enough – on what will determine whether Wednesday’s hike will prove to be the last of the cycle, or the bank will see a need to nudge rates higher one more time.
Clearly, the inflation trend is critical. The bank noted that three-month core inflation – a shorter-term gauge of price trends that the bank hadn’t mentioned in the previous October statement – is in decline. This emerging focus on the shorter-term core inflation trend indicates that the bank won’t get too bogged down on the year-over-year inflation rate (still near 7 per cent over all, and about 5 per cent in the bank’s core measures) in assessing whether its rate hikes are cooling inflationary pressures.
The statement also hinted that signals of domestic demand may take a front seat to overall economic growth in guiding the bank’s views on the effectiveness of its rate hikes. Canadian monetary policy can’t do much about international economic forces, which are sustaining strong prices for Canadian commodity exports. But the slowdown in domestic demand in the third quarter is evidence that higher rates are digging into the economy – and the bank wasn’t shy about saying so on Wednesday.
One thing the Bank of Canada left less than clear was its interpretation of recent employment data. The statement said next to nothing on the labour market, other than that it “remains tight” and unemployment is “near historic lows” – hardly groundbreaking observations at this stage.
Mr. Macklem has been emphatic that a cooler labour market is essential to taming inflation – and, thus, central to policy direction. Without more visibility into the bank’s interpretation of the most recent labour data, we can’t claim to see how far it is leaning toward ending rate hikes.
We might get some additional clarity on the bank’s shifting rate policy as soon as Thursday afternoon. Deputy Governor Sharon Kozicki will deliver the bank’s “economic progress report,” the bank’s standard next-day speech designed to elaborate on the rate decision. The speech will be followed by a media conference.
Perhaps that will give us a better sense of how clearly the Bank of Canada is willing to telegraph its next move. But we may find that it prefers, for the time being, to hold its final card on rate hikes close to its vest.