A quick thought on the Bank of Canada rate hike from Stephen Brown, deputy chief north America economist:
The Bank of Canada’s 25bp hike today, taking the policy rate to 5.0%, is likely to be the last in this cycle. With the labour market loosening, core inflation declining and the survey indicators implying that inflation expectations are normalising, we expect the Bank’s next move to be a rate cut – albeit not until 2024.
Unlike in June, the decision to hike was correctly anticipated by the majority of forecasters and markets were pricing in an 80% chance of the move. The accompanying policy statement did not provide any explicit forward guidance, but the tone was hawkish. It noted that “while the Bank expects consumer spending to slow in response to the cumulative increase in interest rates, recent retail trade and other data suggest more persistent excess demand in the economy”, while highlighting that strong immigration is initially putting upward pressure on activity and prices before any beneficial effect of reduced labour shortages is felt. Indeed, the Bank reiterated that “with three-month rates of core inflation running around 3½-4% since last September, underlying price pressures appear to be more persistent than anticipated.”
Reflecting those concerns, the Bank upgraded its forecasts for both GDP and inflation in the new Monetary Policy Report. It now expects quarterly GDP growth to average about 1% annualised for the next four quarters, well below the economy’s potential of nearer 2% but significantly better than the consensus forecast of a mild recession. The Bank has pushed back its assumption for when headline inflation will reach 2.0% to mid-2025, although its forecasts for inflation of 2.9% in Q4 2023 and 2.2% in Q4 2024 show it still expects significant improvement before then.
In terms of inflation at least, we think the Bank is taking a glass half-empty approach. Its own surveys imply that capacity and labour shortages have now mostly returned to pre-pandemic norms, while inflation expectations have eased considerably and should continue to decline as actual inflation falls. Despite the Bank’s hawkish bias and continued concern that “that progress towards the 2% target could stall”, we expect a further slowdown in GDP growth and evidence of easing core inflation to persuade the Bank to keep policy on hold over the rest of the year.
Closing summary
Almost 1 million UK homeowners will be forced to shell out at least £500 more a month to cover mortgage payments by the end of 2026, as borrowers suffer the “consequences” of rising interest rates, the Bank of England has warned.
Forecasts released on Wednesday showed that of the 4 million homeowners expected to roll on to new mortgage contracts over the next three years, the majority will be paying up to £220 more a month to cover the mortgage by the end of this year because of the difficulty of finding contracts with comparable rates.
The payments of more than 1 million borrowers are likely to rise by more than twice that amount by the end of 2026.
The UK’s largest banks are strong enough to weather a £125bn financial hit during a severe economic downturn, despite facing mounting stress from rising interest rates, according to the Bank of England.
Price rises for US goods and services hit a two-year low in June, a sign that inflation is continuing to ease as the economy responds to the US Federal Reserve’s rapid increases in interest rates.
Stock markets have rallied on the news, with the Nasdaq and S&P 500 on Wall Street hitting new 15-month highs, while European markets are all up more than 1%.
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