In a refreshing change of pace, the Bank of Canada has voted to keep the overnight rate unchanged at its monetary policy meeting held today on the 8th of March. The pause in hiking wasn't out of line with expectations given the bank's Governor, Tiff Macklem, had publicly set intentions to do so after their last meeting.
In an effort to bring inflation under control, and in line with much of the developed world, the Bank of Canada has increased interest rates at a record pace during the last 11 months, bringing them up to their current level of 4.5%.
Inflation stood at 5.9% in January, which is still significantly over the bank's preferred target of 2%, but Macklem suggested it would refrain from making any more adjustments for the time being in order to give the consequences of previous hikes time to take effect.
Waiting for the ‘lag’ to unfold
The Bank of Canada says it typically takes between six and eight quarters for monetary policy interventions to have their full influence on inflation and ripple through the economy. As a result, monetary policy is always prospective, and the policy rate is determined based on the central bank's assessment of where inflation is expected to be in the future, not where it is presently.
A large part of the equation for the length of time for interest rate rises to fully impact inflation is the effect it has on the property market.
The consensus projection of 13 Reuters housing experts polled between February 15th and February 28th 2023 predicts that the average price of a house in Canada would decline by 12.0% this year, compared to its high in early 2022.
Yet, this anticipated reduction is nothing compared to the more than 50% increase that happened at the height of the pandemic, indicating that a major correction is overdue to happen in the housing sector in the near future.
Economy slowing but jobs market still tight
In the GDP report released by Statistics Canada last week, the Canadian economy finally hit a plateau in the fourth quarter of 2022, showing no growth from the previous quarter after expanding for five consecutive quarters and posting a gain of 0.7% in the third quarter. In addition, the annual inflation rate dropped to 5.9% in January, the lowest level in almost twelve months.
Also in January, Canada's annual producer inflation dropped to 5.4% from the upwardly revised 7.7% in the previous month. The Ivey Purchasing Managers Index for Canada fell to 51.6 in February after hitting a high of 60.1 in January this year, falling short of the 55.9 predicted by economists.
The jobs market is still showing signs of being stubborn to the effects of the tightening regime though. In January, the economy added 150 thousand jobs, the biggest increase since February last year and a huge surprise given that market projections were of a 15 thousand gain. The unemployment rate also stayed stable at 5%.
The USD/CAD currency pair supported by stronger American dollar
The American dollar strengthened recently against its counterparts, as the probability of higher than expected interest rates in the United States (not to mention the probability of those rates staying high for a long time), is rising with inflation, showing no signs of peaking and the job market being still quite resilient.
Yesterday, the Head of the Federal Reserve, Jerome Powell, spoke in front of Congress for his first public appearance this year and since the most recent round of interest rate hikes, and both his words and his behavior gave the impression that those who were looking for relief from the ongoing cycle of monetary policy tightening should not get their hopes up just yet.
During his speech, the USD rallied and the probability of a 50 basis percentage point increase to 500-525 at the next meeting increased from 29.9% a week ago to 74.9% at the time of writing, according to the CME Group FedWatch Tool.
Daily Dollar Index Chart - Source: The online trading platform from ActivTrades powered by TradingView
After a strong rise during Powell’s speech, the currency pair seemed to be flattening around its overbought area (RSI>70) in its 4-hour chart, trading at a level unseen since November 2022. At the time of the Bank of Canada announcement, the USD/CAD increased on the news of the Bank of Canada maintaining its policy rate (its target for the overnight rate at 4.50%, for the Bank Rate at 4.75% and for the deposit rate at 4.50%).
Despite this, the market sentiment indicator from the regulated CFD broker ActivTrades shows that most traders are betting on a fall of the currency pair, as they are mostly sellers (79% of all traders).
4-hour USD/CAD Chart - Source: ActivTrader trading platform
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