Bank of Canada Cuts by 25 basis points, to 4.75% as Economy and Inflation Slowed. QT Continues

Rate hikes appear more effective in Canada than in the United States in slowing the economy and lowering inflation.

By Wolf Richter for WOLF STREET.

“With continued evidence of a slowdown in underlying inflation,” the Bank of Canada said today that “monetary policy no longer needs to be so tight” and cut interest rates. interest rates of 25 basis points, as widely expected.

But QT will continue, the statement said. The BOC has already lost 64% of the titles it added during the pandemic.

It lowered its overnight rate target to 4.75%; the discount rate at 5.0% and the deposit rate at 4.75%.

“Recent data has reinforced our confidence that inflation will continue towards the 2% target,” he said in the statement today.

Employment “has grown at a slower rate than the working-age population,” the statement said, referring to the huge wave of immigration that has flooded the job market. “Wage pressures remain but appear to be gradually easing,” the report said.

Due to the huge wave of immigration, GDP per capita has declined in six quarters of the last seven quarters (except for a slight increase in the first quarter of 2023), with economic growth stopping in second half of last year and too slow during the last quarter. remaining quarters to track population growth.

“However, housing price inflation remains high,” the statement said. So this is it. If it weren’t for the rents. Rents have gone up because this huge wave of immigrants needs rental housing, and no one was prepared for that.

“Risks remain for the inflation outlook,” the BOC said. It “closely monitors developments in underlying inflation and remains particularly focused on the balance between supply and demand in the economy, inflation expectations, wage growth and business behavior in terms of price.

Two FIs for more discounts: “If inflation continues to slow (#1 IF) and our confidence that inflation is heading sustainably towards the 2% target continues to increase (#2 IF), it is reasonable to “Expect further reductions in our key interest rate,” BOC,” Governor Tiff Macklem said at the news conference.

He highlighted four risks to the outlook for falling inflation:

“We don’t want monetary policy to be more restrictive than it needs to be to bring inflation back to its target. But if we lower our key interest rate too quickly, we could jeopardize the progress we have made. Further progress in reducing inflation is likely to be uneven and risks remain,” he said.

“We have come a long way in the fight against inflation. And our confidence that inflation will continue to approach the 2% target has strengthened in recent months,” he said.

He said “indicators of underlying inflation increasingly point to a lasting slowdown” in inflation. He cited these four measures:

  • “CPI inflation fell from 3.4% in December to 2.7% in April
  • “Our preferred measures of core inflation rose from around 3.5% last December to around 2.75% in April.
  • “3-month core inflation rates have slowed from around 3.5% in December to less than 2% in March and April.
  • “The proportion of CPI components increasing faster than 3% is now close to its historical average, suggesting that price increases are no longer unusually widespread. »

“All this means is that tight monetary policy aims to ease price pressures,” Macklem added. “And with more and more durable evidence underlying slowing inflation, monetary policy no longer needs to be so restrictive. In other words, it is appropriate to lower our key interest rate.”

Why higher rates could be more effective in Canada than in the United States.

There has been much discussion about why rate hikes appear to have been more effective in Canada than in the United States in slowing the economy and lowering inflation.

This is partly due to the way mortgages are structured in Canada. The mainstream mortgage rates in Canada are either adjustable rate mortgages whose rates adjust for existing borrowers as rates increase, or fixed rate mortgages whose rates are fixed for shorter terms, such as two or five years, and borrowers face very long renewals. higher rates. So it’s existing borrowers who are facing higher mortgage payments on homes they’ve lived in for years, which dampens spending on other things, thereby slowing demand growth.

In the United States, with a typical 30-year fixed-rate mortgage, only new borrowers face higher mortgage rates, and existing borrowers, with their 3% mortgages, are laughed all the way to the bank.

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Sara Adm

Aimant les mots, Sara Smith a commencé à écrire dès son plus jeune âge. En tant qu'éditeur en chef de son journal scolaire, il met en valeur ses compétences en racontant des récits impactants. Smith a ensuite étudié le journalisme à l'université Columbia, où il est diplômé en tête de sa classe. Après avoir étudié au New York Times, Sara décroche un poste de journaliste de nouvelles. Depuis dix ans, il a couvert des événements majeurs tels que les élections présidentielles et les catastrophes naturelles. Il a été acclamé pour sa capacité à créer des récits captivants qui capturent l'expérience humaine.
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