Global equity markets advanced over the week ended March 22 after the U.S. Federal Reserve Board (“Fed”), and other central banks, signalled intentions to begin lowering interest rates this year. Canada’s main equity index, the S&P/TSX Composite Index, advanced over the week, lifted higher by the Health Care sector. U.S. equities also rose over the week. Yields on 10-year government bonds in Canada and the U.S. ticked lower. Oil and gold prices ended largely flat over the week.
Canada’s inflation rate falls
Inflationary pressures in Canada moderated in February to their lowest level since June 2023, which surprised economists who were expecting the inflation rate to increase.
Canada’s inflation rate fell to 2.8% in February from 2.9% in the previous month. Economists were expecting a 3.1% rate.
The growth in prices for food slowed over the month, while prices for gasoline increased year-over-year. Dragging down the overall inflation rate was a sharp drop in cellular and internet services, which fell by 26.5% and 13.2%, respectively.
February’s drop might reinforce the Bank of Canada’s expectation of beginning to lower interest rates this year.
Consumer demand appeared to slip in January. Retail sales in Canada fell by 0.3%, which was the first decline in five months.
Fed points to rate cuts this year
In a move widely expected by market participants, the Fed held the target range of its federal funds rate steady at 5.25%–5.50%.
This marked the fifth consecutive rate hold by the Fed, keeping its federal funds rate at its highest level since 2001.
Before beginning to reduce interest rates, Fed officials noted it needs more evidence inflation will fall sustainably to its 2% target.
Looking ahead, Fed officials believe there may be three interest rate cuts this year, but rates might remain relatively elevated through 2025 on expectations of still-elevated inflation.
The Fed projects the U.S. economy to expand by 2.1% this year and 2.0% next year. The personal consumption expenditure price index, the Fed’s preferred inflation gauge, is expected to be 2.4% this year and 2.2% in 2025, which is above previous estimates.
European services sector activity accelerates
A preliminary estimate from S&P Global showed services sector activity in Europe accelerated in March, but a decline in manufacturing sector activity weighed on overall business activity.
The services sector expanded for a second straight month, benefiting from a rise in new orders, the first increase in nine months.
On the other hand, manufacturing sector activity contracted again, this time hurt by a drop in output and new orders, which weighed on employment.
Economic activity in Europe remains relatively muted. Meanwhile, inflationary pressures have softened, with Europe recording an inflation rate of 2.6% in February.
During a speech, European Central Bank (“ECB”) President Christine Lagarde commented that the ECB might begin lowering interest rates in June, dependent on its set of inflation and economic predictions at that time.
BoJ raises interest rate for the first time in 17 years
For the first time since 2007, the Bank of Japan (“BoJ”) raised its policy interest rate.
The BoJ’s key interest rate rose to a target range of 0.00%–0.10% from −0.10%, where it had been for the past eight years. Negative rates were used to help spur economic activity.
Japan’s central bank also ended its yield curve control for 10-year Government of Japan bonds.
The move comes as Japan’s inflation rate has remained above the BoJ’s 2% target for over a year.
Furthermore, large companies in Japan have agreed to raise salaries by 5.3%, which should help consumer spending, thus helping Japan’s overall economic health.
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