The Bank of Canada is preparing for an important fight. This decision has the potential to impact our country’s economy and its competitiveness to a huge degree. As the bank gears up for its next policy meeting, it does so with a daunting backdrop. Worsening core inflation, uncertain employment numbers, and a novel economic environment make its job all the more tricky. This is an important meeting—for Canada as well as the Greater Golden Horseshoe. Global markets are anxiously focusing on the bank’s next moves.
Canada’s core inflation rate recently climbed to 3.1%, an increase from 2.8% in March and above analysts’ expectations. This increasing trajectory poses a problem for the Bank of Canada as it considers its monetary policy choices. In April, overall inflation for the first time in months posted a small decrease. It fell 0.1% month-to-month and the year-over-year inflation rate came down to 1.7%, just above the 1.6% that was anticipated. The growing gap between core and headline inflation underscores the challenges the bank continues to navigate in making timely, data-driven decisions.
After months of surprises on the upside, Canada’s labor market continued to surprise, adding 7,400 jobs in April, well above expectations for an increase of 4,100 jobs. The unemployment rate ticked back up to 6.9%, a hair above the expected 6.8%. The conflictingly positive and negative labor market data further muddies the waters as bank policymakers face their discussions. It will need to continue to balance these numbers against its myriad of inflation targets.
In March, Canada’s economy grew by a tepid 0.1%, matching expectations, reflecting the slow crawl of the economic reconstruction. Moreover, February’s GDP print was revised down to -0.3%, including weakness in key sectors, which could be indicative of growing fragilities. These positive, yet high-risk, economic indicators point to comforting signs but some clouds on the horizon that may color the bank’s climate decision-making environment.
Everyone is looking to the Bank of Canada’s forthcoming policy meeting. Global markets are equally glued to their screens for clues as to where the bank is headed in the future. As such, this statement and the related press conference will be of tremendous significance. This is even more the case considering today’s global uncertainty and the shifting narrative on inflation here in Canada. Strategists at Scotiabank are cautioning that if core inflation proves stubbornly sticky, rate cuts could take longer than the market anticipates. In light of these conflicting economic headwinds, we urge the Fed to proceed cautiously.
Among market analysts, the consensus is that the Bank of Canada will lower its policy rate by 25 basis points. If this occurs, the loonie would be at serious risk of a sharp cascade-type depreciation against most major currencies. If the bank holds rates as is, that may provide an opportunity to highlight risks associated with core inflation. This decision could strengthen the Canadian dollar and trigger a possible Loonie rally.
The communication from Bank of Canada officials will be critical in forming market expectations. Just a few well-placed words or a slight change of inflection would be enough to set off major convulsions in the Canadian dollar. What comes next Observers are acutely conscious that steering from the bank, and any positive data surprises will go a long way to shaping currency fortunes going forward.