Despite a Expected Cooler CPI Print, Consensus Builds That Governor Macklem Will Hold Steady, Awaiting More Sustained Evidence
OTTAWA – As Statistics Canada prepares to release its latest Consumer Price Index (CPI) data, economists and market analysts widely predict a modest decline in the annual inflation rate. However, the prevailing consensus is that this single data point will be insufficient to persuade the Bank of Canada (BoC) to pivot from its current hold strategy on interest rates.
The central bank’s Governing Council, led by Governor Tiff Macklem, has been adamant that it needs to see sustained, downward momentum in core inflation measures before considering rate cuts, arguing that the path to the 2% target will be slow and uneven.
The Case for a “Hold”: Why One Month Isn’t Enough
Several key factors are contributing to the expectation that the BoC will remain on pause:
- Focus on Core Inflation: The Bank prioritizes its core measures of inflation—CPI-median and CPI-trim—which strip out volatile components like food and energy. While headline inflation may dip, these core measures have proven “sticky,” remaining stubbornly elevated and indicating persistent underlying price pressures within the economy.
- The Danger of Premature Pivoting: The BoC is acutely aware of the risk of cutting rates too early, only to see inflation flare up again. Such a scenario would severely damage the Bank’s credibility and could require even more aggressive—and economically painful—rate hikes later on. Their stated goal is to avoid having to “do more later.”
- Domestic Economic Pressures: Strong wage growth, robust population increases driving demand, and persistent inflation in services sectors like haircuts and rent continue to give the Bank pause. These elements are largely domestic and are not as easily influenced by global factors.
- Data Dependence: Governor Macklem has repeatedly stated the Bank is taking its decisions “one meeting at a time” based on the totality of incoming data. A single favourable inflation print would be viewed as a welcome step, but not a definitive trend.
What Economists Are Saying:
“While we expect to see some improvement in the headline number, it’s unlikely to be a game-changer for the Bank,” said Avery Shenfeld, Chief Economist at CIBC Capital Markets. “They’ve been clear they need a string of good numbers, particularly on the core measures, to gain the confidence that inflation is truly on a sure path back to target.”
“The Bank simply cannot afford to be faked out by one positive report,” added Douglas Porter, Chief Economist at BMO Financial Group. “The memory of the inflation surge has left a lasting impression, and the Governing Council will require overwhelming evidence that the battle is won before they declare victory and start cutting.”
The Road Ahead: What the Bank is Watching
The Bank of Canada’s next interest rate decision is scheduled for March 6, 2024. Beyond the January CPI report, the Governing Council will scrutinize:
- Q4 GDP Data: To assess whether the economy is cooling as expected.
- Business and Consumer Surveys: For data on inflation expectations, which are critical for preventing a wage-price spiral.
- Global Economic Developments: Including actions by the U.S. Federal Reserve.
- The next CPI report in March, which will be released after the March 6th announcement but will be a key input for the April decision.
Market Implications
Money markets are currently pricing in a very low probability of a rate cut at the March meeting, with the first cut fully priced in for June or July. A “hold” decision in line with expectations would have a limited market impact. The greater focus will be on the Bank’s accompanying statement and any subtle shifts in language that might signal its future intentions.
Conclusion:
While a dip in inflation is a positive sign, the Bank of Canada’s reaction function has shifted from one of alarm to one of extreme patience. For Governor Macklem and his team, the burden of proof remains high. They are likely to view a modest improvement not as a green light, but merely as a sign they are on the right path—a path they intend to walk with deliberate caution.