The Conference Board of Canada’s Principal Economist Alicia Macdonald offers the following perspectives/insights:
“As was widely expected, the Bank of Canada left its overnight rate unchanged in December. However, with the economy growing in step with the Bank’s forecast, economic capacity rapidly diminishing, and an acceleration in wage growth, we expect that the Bank will continue to gradually increase interest rates throughout next year.”
—Alicia Macdonald, Principal Economist, The Conference Board of Canada.
- After back-to-back rate increases in July and September, the Bank of Canada remained on hold in December, leaving its target for the overnight rate at 1.0 per cent.
- The press release accompanying the December decision shows a central bank whose next move remains dependent on incoming data.
- The Bank remains cautious in its approach to future rate changes, while also mindful of the ongoing but diminishing slack in the labour market and an uptick in core inflation as economic slack is absorbed.
- Data released at the beginning of December showed that the economy grew at 1.7 per cent in the third quarter—slightly below the Bank’s 1.8 per cent forecast. However, growth is expected to accelerate in the fourth quarter given strong export gains in October and solid employment growth, which will continue to support consumption.
- The Bank has flagged weak wage growth in previous communications but that weakness has now started to dissipate. After posting an abysmal year-over-year gain of just 0.7 per cent in April, growth in average hourly wages has picked up momentum, reaching 2.8 per cent in November.
- While inflation is currently increasing at a subdued pace (as predicted by the Bank in October) the rapid reduction in excess capacity and the recent acceleration in wage growth suggests that inflation pressures are likely brewing.
- Against a backdrop of diminished excess capacity and strong wage growth, a continued withdrawal of monetary stimulus will be required next year.