Posthaste: Bank of Canada's 4 inflation 'pillars' no longer flashing red, analyst says
The “four pillars” the Bank of Canada says it will use to measure progress against inflation and guide interest rate decisions have already fallen into line, argues one analyst, blunting the central bank’s hawkish warning that it will hike again if price pressures don’t relent.
In its Sept. 6 decision to hold rates at five per cent, the central bank warned further hikes depended on “excess demand, inflation expectations, wage growth and corporate pricing power.”
The Bank of Canada cited these four measures as its guide when it hiked rates to current levels on July 12.
“Well, excess demand has been eliminated, five-year inflation break-evens are well-anchored around two per cent, sequential momentum in wage growth has come to a screeching halt, and margins continued to compress throughout Q2,” said Jay Zhao-Murray, an analyst with commercial foreign exchange company Monex Canada, in a note following the release of the central bank’s decision.
Zhao-Murray broke down each of the measures to make the case that the Bank of Canada has achieved its goal of slowing the economy and inflation with its previous 10 rate increases.
Zhao-Murray said the case that “excess demand” persists is a hard sell given that second-quarter GDP contracted 0.2 per cent, well below the central bank’s projections in July for 1.5 per cent growth.
The Monex Canada analyst also noted that growth is currently running well below of the central bank’s estimated range for potential GDP growth of between 1.4 per cent and three per cent.
“The BoC will undoubtedly need to downgrade its growth forecasts in the next Monetary Policy Report, and it will struggle to argue that excess demand still lingers in the economy,” Zhao-Murray said.
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