Posthaste: Bank of Canada could cut rates by early 2024 — if it goes by this data
Good morning,
When is enough, enough?
That has become the burning question as the Bank of Canada and other central banks near the end of what has been an extraordinary interest rate-hiking cycle.
To answer that you need to understand what the Bank is looking at in making its inflation forecasts, say CIBC economists Avery Shenfeld and Ali Jaffery in a new report.
And those signposts have changed.
There was a time when it was self-evident, said the economists. The Bank would look at whether real gross domestic product would run above or below its estimate for Canada’s non-inflationary potential — something known as the “output gap.”
But that reading became much more challenging during the labour shortages, supply chain disruptions and productivity lags of the COVID-19 pandemic.
“The reality is that the output gap hasn’t been a useful tool, or a guide to forecasting BoC rate decisions, since the fall of 2021,” said Shenfeld and Jaffery. “Understanding what has replaced it is therefore key for financial market participants.”
The labour market — unemployment, job vacancies and wages — have become a much more reliable indicator of excess demand or supply than the “ever-vacillating measure of the output gap,” they argue.
As evidence that these measures were gaining importance, the Bank began including labour market indicators in its monetary policy reports.
On this front there have been definite signs of improvement, at least from the perspective of the inflationary battle.
In July the unemployment rate rose to 5.5 per cent, nearing the 5.7 per cent which CIBC calculates is the sweet spot or NAIRU, the non-accelerating inflation rate of unemployment.
“A couple more quarters of soft job gains and an upward creep in unemployment
Read more on financialpost.com
