Yesterday the Bank of Canada kept rates unchanged and noted that "the economy had stalled since the middle of 2023, consumers have pulled back their spending, business investment had contracted, labour market conditions have eased, wages are still rising around 4%to 5%".
The data supports those assertions and in "normal times", that would probably be enough to start cutting rates and relieve the economy of tight policy before untold damage gets done. The reason for maintaining unchanged rates, however, and thus a tight Monetary Policy, is clearly due to their concerns about inflation.
This research note looks at Canadian inflation data in detail and demonstrates that the overall Bank of Canada theme about persistence in underlying inflation is NOT backed up by the data. Indeed the opposite seems to be true.
This is clearly important because as the BoC states, the economy has already stalled and a persistent tight policy could lead to much lower inflation than expected as the highly leveraged private sector struggles with high interest rates. This offers interesting opportunities given current fixed income market pricing.