Last Week: Key Global Events

The Economy

Monetary policy

 

The Bank of Japan’s nine-member board voted unanimously to maintain the target for overnight interest rate at 0.5%, as widely expected, after voting 8 to 1 to raise the policy rate by another 25 basis points to 0.5% in January in a third rate hike during the current normalization process that began in March 2024. Members are closely monitoring whether expected high wage increases by major firms will spread to smaller firms in fiscal 2025 starting on April 1 at a time when real wages are falling, which could hurt consumption further and generate deflationary pressures.

 

The board continues to expect  inflation to be anchored around its 2% target by early 2026, saying, “In the second half of the projection period (from fiscal 2024 through fiscal 2026 ending March 2027), underlying CPI inflation is likely to be at a level that is generally consistent with the price stability target.”

 

The board also maintained its view that it provided in the bank’s quarterly Outlook Report issued in January: “Japan’s economy is likely to keep growing at a pace above its potential growth rate, with overseas economies continuing to grow moderately and as a virtuous cycle from income to spending gradually intensifies against the background of factors such as accommodative financial conditions.”

 

Board members warned that “high uncertainties” over Japan’s economic outlook remain. Risk factors include the impact of the protectionist U.S. trade policy and retaliation by other countries on global growth and inflation, commodity prices and domestic firms’ wage- and price-setting behavior.

 

The BOJ is on course for two more 25 basis point rate hikes that would take the overnight interest rate target to 1% by late 2025 or early 2026 as part of its gradual normalization process after more than a decade of large-scale easing.

 

The bank is in the process of normalizing its policy by gradually lifting the rates that had been in a range of zero and slightly negative until a year ago. The BOJ under Governor Ueda, who took office in April 2023, shifted gear in March 2024 with its first rate hike in 17 years and an end to the seven-year-old yield curve control framework, following a decade of large monetary easing aimed at reflating the economy. The board stood pat in December, October and September after voting 7 to 2 in July to hike the rate to 0.25% from a range of 0% to 0.1%.

The FOMC left the fed funds target rate unchanged at 4.25-4.50 percent. The statement was largely unchanged from the prior one except to note that uncertainty around the economic outlook has increased after the previous assessment that the risks to the outlook were roughly in balance. The statement repeated, “The Committee is attentive to the risks on both sides of its dual mandate.”

 

While interest rate policy was unchanged, the FOMC announced a change to its program to reduce its reserves of US treasuries and agency mortgage-backed securities. The statement said, “Beginning in April, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $25 billion to $5 billion. The Committee will maintain the monthly redemption cap on agency debt and agency mortgage-backed securities at $35 billion.”

 

The vote to maintain the fed funds rate at its present level is unanimous. However, Governor Christopher Waller dissented on the change in the cap on reinvestments. He “preferred to continue the current pace of decline in securities holdings.”

 

The summary of economic projections (SEP) shows a substantial downward revision for GDP growth in 2025 to up 1.7 percent in the March forecast compared to up 2.1 percent in the December forecast. The unemployment rate is forecast up a tenth to 4.4 percent compared to 4.3 percent in the prior projections. The PCE deflator is now expected to rise 2.7 percent in 2025, and upward revision from the previous up 2.5 percent and the core PCE deflator is expected to rise 2.8 percent in 2025 after the previous forecast of up 2.5 percent.

 

From the current midpoint of the fed funds rate, the projected appropriate path of monetary policy now looks for roughly two rate cuts of 25 basis points each to reach 3.9 percent at the end of 2025.

 

 The Bank of England’s Monetary Policy Committee continues its delicate balancing act, holding the Bank Rate at 4.5 percent, with only one dissenting vote favouring a cut to 4.25 percent. This decision reflects measured caution amid persistent inflationary pressures despite earlier disinflationary progress.

 

Inflation remains a sticking point. CPI inflation rose to 3.0 percent in January, exceeding expectations and reinforcing the need for monetary restraint. While wage and domestic price pressures are easing, they remain elevated. Energy prices have recently declined but are still higher than a year ago, keeping inflation concerns alive. The MPC forecasts CPI inflation to peak at 3.75 percent in the third quarter of 2025 before declining—a signal that restrictive policy must persist.

 

Global uncertainties add complexity. Trade tensions, new US tariffs, and European fiscal reforms contribute to volatility. While UK GDP growth has outperformed expectations, business surveys suggest economic fragility, particularly in employment intentions.

 

The Bank remains cautiously data-dependent, assessing whether demand weakness will ease inflation or if sticky wage-price dynamics necessitate tighter policy. Ultimately, monetary restraint remains the status quo, with policymakers closely watching economic signals before considering future rate adjustments.

 

Inflation

 

Canada’s Consumer Price Index jumped 1.1 percent in February on a monthly basis, after experiencing a 0.1 percent uptick in January, exceeding expectations for a 0.6 percent rise in the Econoday survey of forecasters.

 

Compared to February 2024, the CPI is up 2.6 percent, speeding up from the 1.9 percent pace set in January, and above expectations for a 2.2 percent rise in the Econoday survey of forecasters.

 

Excluding food and energy prices, the CPI rose by 0.9 percent on a monthly basis, following a 0.1 percent dip in January. Compared to a year ago, the core CPI is up 2.9 percent in February vs. a 2.2 percent increase in January.

 

The average of the Bank of Canada’s ‘Alternative measures’ of annual core inflation for January is 2.9 percent, up from 2.7 percent in January.

 

There is no indication from StatsCan that the trade war with the United States played a role in last month’s spike in consumer prices, with the expectation that the impact will be “in the coming months.”

 

Instead, StatsCan points to the end of the goods and services tax/harmonized sales tax break, which stopped affecting prices after Feb. 15, that had “upward pressure on consumer prices for those items, as taxes paid by consumers are included in the CPI.”

 

Restaurant food prices contributed the most to the February CPI’s acceleration.

 

Shelter price growth continued to slow down but remains elevated – rising 4.2 percent year over year, easing off a bit from January’s 4.5 percent annual growth rate. The Bank of Canada at its March meeting highlighted the “persistence of shelter price inflation” as the main factor keeping core inflation above 2 percent.

 

The inflation data underlines the balance of risks facing the Canadian economy, as inflation should accelerate in coming months as tariffs drive prices higher, even as the trade war dampens economic activity.

 

Prices for goods are up 1.5 percent from a year ago in February, after a 0.9 percent increase in January. Meanwhile, service price inflation surged by 3.6 percent in February, following a 2.8 percent increase in January.

Demand

 

U.S. February retail sales rose by 0.2 percent to start the year, not enough to offset the revised 1.2 percent monthly decline (previously -0.9 percent) reported for January, and a much smaller rebound than the 0.7 percent increase expected in the Econoday survey of forecasters.

 

Core retail sales, removing autos and gasoline sales, rose 0.5 percent last month – as expected and almost regaining ground lost in January (revised from -0.5 percent to -0.6 percent). Core retail sales are up 3.5 percent on an annual basis in February compared to a 3.6 percent (previously 3.9 percent) y/y rise in January.

 

There was a 2.4 percent jump in online sales, as severe winter weather likely kept many consumers at home. Auto sales declined by 0.6 percent, electronics and appliance stores -0.3 percent, sporting goods -0.4 percent, clothing stores -0.6 percent, and food services and drinking places -1.5 percent.

 

This data once again underlines the “balance of risks” to the economy that Fed officials continue to emphasize.

 

Compared to a year ago, retail sales are up 3.1 percent, compared to January’s revised 3.9 percent jump (previously +4.2 percent).

 

Excluding gasoline, retail sales rose by 0.3 percent, not enough to negate January’s 1.4 percent decline, and are up 3.4 percent from February 2024 vs. +4 percent on an annual basis in January.

 

Stripping out purchases of motor vehicles and parts, sales also increased 0.3 percent compared to a revised 0.6 percent decrease (from -0.4 percent) in January. On an annual basis, retail sales ex-autos are up by 3.1 percent, a slowdown from January’s 3.5 percent (previously 3.7 percent) rise.

Production

 

A more robust picture of the industrial sector than expected: Industrial production came in much stronger than the consensus forecast with output up 0.7 percent on the month in February after a revised 0.3 percent rise in January (versus an increase of 0.5 percent previously reported for January). The consensus looked for a modest 0.2 percent increase for February.

 

Manufacturing jumped by 0.9 percent on the month, with a lift from an increase of 8.5 percent in motor vehicles and parts. Plus gains were evident in most other categories of durable goods manufacturing. Expectations for manufacturing called for a muted 0.1 percent increase. Manufacturing was revised up to show an increase of 0.1 percent in January, up from a decline of 0.1 percent previously reported.

 

Capacity utilization surged to 78.2 percent in February from a revised 77.7 percent in January (previously 77.8 percent), well above the expected 77.8 percent. Even with the rise, capacity remains 1.8 percentage points below its long-term average.

 

On the plus side, mining jumped by 2.8 percent on the month. Utilities output was down 2.5 percent after surging by 6.1 percent on cold winter weather in January.

 

US Review

Uncertainty is the Fed’s Watchword

 

By Theresa Sheehan, Econoday Economist

 

As expected, the FOMC held the fed funds target rate range steady at 4.25-4.50 percent at the March 18-19 meeting. There was little change in the statement regarding the economy, labor market, inflation, and inflation expectations. What was different was language highlighted the elevated uncertainty around the outlook for monetary policy.

 

Between the FOMC statement and Fed Chair Jerome Powell’s press conference, the message is one that the so-called “hard data” remains consistent with modest expansion and a healthy labor market, and that the recent uptick in prices brought about by tariffs is likely to be “transitory.” The “transitory” is only in the sense that many prices will be pushed higher with the imposition of the new import taxes, but that while prices will remain at the higher level, the upward price pressure will be short-term.

 

Powell did not ignore the “soft data” of various surveys of confidence and inflation expectations. He did offer the caveat that changes as expressed by surveys are often not reflected in actual changes in behavior. As such, Powell said Fed policymakers were paying attention to the shifts in perceptions, they were taking a cautious approach to incorporating it into their policy outlook. The quarterly update to the summary of economic projections (SEP) pointed to somewhat less optimism about growth for this year and for further progress on disinflation, but only minimal downgrades in regard to the labor market. The FOMC is still looking at rate cuts in 2025 and the next couple of years, although forecasts stretch the removal of restriction in interest rate policy out over a longer period.