Bank of Canada Keeps Policy Rate Steady and Persists with Quantitative Tightening

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Bank of Canada Keeps Policy Rate Steady and Persists with Quantitative Tightening
Today, the Bank of Canada maintained its goal of 5% for the overnight rate, 5% for the bank rate, and 5% for the deposit rate. The Bank is sticking to its quantitative tightening strategy.

Due to demand pressures from recent increases in global bond yields and past policy rate hikes, the world economy is already slowing down, and growth is expected to further weaken. Global GDP growth is expected by the Bank to be 2.9% this year, 2.3% in 2024, and 2.6% in 2025. The outlook for global growth has not much changed from the July Monetary Policy Report (MPR), but its composition has, with the US economy showing signs of strength and China's economic activity contracting from expectations. The euro area's growth has further slowed. Most economies have seen a decrease in inflation as supply constraints loosen and price pressures are reduced due to decreased demand. However, central banks are nonetheless on guard since underlying inflation is still present. The conflict between Israel and Gaza is a new source of geopolitical unpredictability, and oil prices are higher now than they were in July.

There is mounting evidence in Canada that previous interest rate hikes have slowed economic growth and eased pricing pressures. Consumption has decreased, and there is less demand for numerous services, durable products, and housing. Reduced demand and increased borrowing prices are putting pressure on corporate investment. The population boom in Canada is increasing housing demand and spending while relieving pressure on the employment market in some industries. In the labor market, job openings have continued to decline and recent employment gains have lagged behind the growth of the labor force. Nevertheless, wage pressures continue, and the labor market is still quite tight. All things considered, a number of signs point to the economy's supply and demand finally achieving equilibrium.

Following a year of 1% growth on average, economic growth is predicted to remain modest for the upcoming year before picking up in late 2024 and early 2025. The expansionary effects of previous interest rate rises as well as decreased foreign demand are both reflected in the short-term economic difficulties. Stronger exports and company investment in response to improving overseas demand, along with increased consumer spending, are the main drivers of the subsequent upswing. Government spending has a significant impact on growth during the projection period. In general, the Bank projects 1.2% growth in the Canadian economy this year, 0.9% in 2024, and 2.5% in 2025.

Recent months have seen a lot of volatility in CPI inflation: 2.8% in June, 4.0% in August, and 3.8% in September. Inflation in many items that consumers purchase on credit is being moderated by higher interest rates, and this is beginning to extend to services. From very high rates, food inflation is now decreasing. But rent and other housing costs are still rising, on top of higher mortgage interest rates. Wages are still expanding by 4% to 5%, but near-term inflation expectations and business pricing behavior are only slowly moderating. There is not much of a downward trend in core inflation using the Bank's favored metrics.

According to the Bank's October forecast, CPI inflation will hover around 3.5 percent on average until the middle of the next year, then progressively decline to 2% in 2025. The July projection's estimated time for inflation to return to goal is around when it does, but the short-term trajectory is higher due to rising energy costs and persistent core inflation.

The Governing Council made the decision to maintain the policy rate at 5% and to proceed with normalizing the Bank's balance sheet in light of stronger indications that monetary policy is reducing spending and easing price pressures. The Governing Council is willing to hike the policy rate further if necessary, but is worried that the path towards price stability is sluggish and that inflationary risks have escalated. The Governing Council is still concerned with the economy's demand and supply balance, inflation expectations, wage growth, and business pricing practices. It also wants to see a decreasing trend in core inflation. The Bank is unwavering in its resolve to bring back pricing stability for citizens of Canada.

Note of information

December 6, 2023 is the next date on which the overnight rate goal is expected to be announced. On January 24, 2024, the Bank will release in the MPR its next complete prognosis for the economy and inflation, including projection risks.