Bank of Canada Governor Tiff Macklem sticks to the script
The latest forecast from the Bank of Canada shows that the annual inflation rate will slow to around 3% by mid-2023 and reach 2.5% in the fourth quarter.
- Bank of Canada Governor Tiff Macklem expects to stop raising interest rates as Canada enters a new phase of fighting inflation.
- The central bank has raised interest rates eight times since last March, bringing the key rate to 4.5%.
- Inflation (CPI) remains well above the bank’s target of 2%, but the bank expects annual inflation to fall to around 3% by mid-year.
Earlier in the day, Bank of Canada (BOC) Governor Tiff Macklem gave a speech on the central bank’s monetary policy, noting that the Bank of Canada had entered a new phase in its year-long fight against inflation.
Canada’s central bank has raised interest rates eight times since last March, raising its key rate to 4.5% from 0.25% in the fastest monetary tightening cycle in a generation. After a quarter-point hike at the end of January, the bank announced a “conditional break” from further rate hikes.
Echoing a simultaneous speech by Fed Chairman Jerome Powell, Governor Macklem said the Bank of Canada is ready to raise the key rate even more if new evidence begins to accumulate that inflation will not fall as expected.
However, if the new data is in line with expectations and inflation falls as expected, the bank will not need to raise rates further. CPI inflation remains well above the bank’s target of 2%, reaching an annualized rate of 6.3% in January. But Gov. Macklem pointed to progress made in recent months, such as a significant drop in oil prices and a stabilization in durable goods prices.
The bank’s latest forecast shows that the annual inflation rate will slow to around 3% by mid-2023 and reach 2.5% in the fourth quarter. While energy prices pose a risk to the outlook, the bank’s core inflation figures have eased, indicating that core inflation will start to ease over the next few months.
The governor of the Bank of Canada stressed that it takes time for changes in interest rates to fully affect economic growth and inflation.
He noted that the rate hike would hit the housing market first and, over time, reduce consumer spending and business investment as debt service costs rise.
The Bank of Canada expects the Canadian economy to stagnate in the first three quarters of 2023, with a slight recession possible. However, Gov. Macklem did not hint that he plans to cut interest rates, and said it was too early to talk about easing monetary policy.
To put things into perspective, the monetary policy of the Bank of Canada is like a chef’s seasoning for a dish. The chef should add just the right amount of seasoning to bring out the flavor, but too much can overpower the dish.
Similarly, the Bank of Canada must adjust interest rates to manage inflation, but excessive tightening could unnecessarily slow the economy.
Technical Analysis » USD/CAD
Given little new information from Tiff Macklem, the USD/CAD pair was largely flat for the week near 1.3400. On zooming out, the pair remains above its November lows but below its October (and December) highs, signaling price consolidation.
In the short term, traders see the 50-day EMA around 1.3450 as resistance, followed by a downtrend line around 1.3550.
Support lies at the 200-day moving average EMA around 1.3260 and previous resistance has become support at psychological 1.3200.
Matt Weller, CFA, CMT, FOREX.com » Official site
Disclaimer: The information and opinions contained in this report are for general information only and do not constitute an offer or solicitation to buy or sell any currency contracts or CFDs. Although the information contained herein has been obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness and accepts no liability for any direct, indirect or consequential damages that may result from anyone relying to such information.