By Freeway Group Inc.
The Bank of Canada announced today its decision to maintain the target for the overnight rate at 5%, with the Bank Rate at 5¼% and the deposit rate at 5%. The central bank has reiterated its commitment to the policy of quantitative tightening in an effort to address current economic challenges.
Global economic conditions are presenting headwinds, with the prospect of further moderation in growth. This outlook is primarily influenced by previous increases in policy rates and the recent surge in global bond yields, which have put pressure on overall demand. The Bank of Canada forecasts global GDP growth at 2.9% for this year, 2.3% in 2024, and 2.6% in 2025. Although this projection remains in line with the July Monetary Policy Report (MPR), the dynamics have shifted, with the U.S. economy demonstrating resilience, while economic activity in China has been weaker than anticipated. Additionally, growth in the euro area has decelerated. Inflation is on the decline in most economies as supply chain bottlenecks are being resolved, and weaker demand alleviates price pressures. Nonetheless, central banks worldwide remain vigilant, given persistent underlying inflation and new sources of geopolitical uncertainty, such as the ongoing conflict in Israel and Gaza.
In Canada, there is mounting evidence that previous interest rate hikes are dampening economic activity, thereby easing price pressures. This has translated into subdued consumption, softer demand for housing, durable goods, and many services. Businesses have faced the twin pressures of weaker demand and higher borrowing costs, which have hindered investment. The surge in Canada’s population has alleviated labor market pressures in certain sectors while increasing housing demand and consumption. In the labor market, job gains have lagged behind labor force growth, and job vacancies are gradually decreasing. Nevertheless, wage pressures persist as the labor market remains tight. Overall, a range of indicators suggests that the Canadian economy is approaching a balance between supply and demand.
In the immediate future, the Canadian economy is expected to maintain its weakness before gaining momentum in late 2024 and through 2025. The near-term subdued growth is attributed to the broader impact of previous interest rate hikes and sluggish foreign demand. The subsequent upswing is anticipated to be driven by household spending, stronger exports, and increased business investment, all of which are responses to improving foreign demand. Government spending will also contribute significantly to growth in the coming years. The Bank anticipates the Canadian economy to grow by 1.2% in the current year, 0.9% in 2024, and 2.5% in 2025.
Consumer Price Index (CPI) inflation in Canada has exhibited volatility in recent months, ranging from 2.8% in June to 4.0% in August and 3.8% in September. Higher interest rates are helping moderate inflation in credit-financed goods and services, and this moderation is spreading to various sectors. Food inflation is receding from elevated levels, but inflation in rent and other housing costs remains high. In the near term, inflation expectations and corporate pricing behavior are adjusting gradually, and wages continue to grow at rates of 4% to 5%. The Bank’s preferred core inflation measures show limited downward momentum.
In the Bank’s October projection, CPI inflation is expected to average approximately 3.5% through the middle of the next year before gradually easing to 2% in 2025. Inflation is set to return to the target level around the same time as projected in July, albeit with a slightly higher near-term path due to energy prices and ongoing persistence in core inflation.
Given the clearer indications that monetary policy is effectively moderating spending and alleviating price pressures, the Governing Council has opted to maintain the policy rate at 5% and continue the process of normalizing the Bank’s balance sheet. However, the Council acknowledges concerns that progress toward price stability is slow and inflationary risks have increased. The Bank stands ready to further increase the policy rate if necessary. The Council’s focus remains on observing downward momentum in core inflation, maintaining a balance between supply and demand in the economy, assessing inflation expectations, wage growth, and corporate pricing behavior. The Bank reiterates its unwavering commitment to restoring price stability for Canadians.
In conclusion, the Bank of Canada’s decision to maintain its current policy rate amidst global economic challenges reflects a cautious approach to ensure stability and sustainable growth. The Bank will announce its next overnight rate target on December 6, 2023, and provide a comprehensive economic outlook, including risk assessments, in the upcoming Monetary Policy Report on January 24, 2024.
