The overnight Bank of Canada policy rate has remained unchanged at 5%. The decision by the Bank is accompanied by a steady 5.25% Bank Rate and a consistent 5% Deposit Rate.
This Bank of Canada policy rate comes against the backdrop of a global economy that appears to be losing momentum.
This is due to previous increases in policy rates and recent spikes in global bond yields, which have dampened overall demand.
The Bank’s economic projections paint a nuanced picture, forecasting a 2.9% growth in global GDP for the current year.
However, the outlook for 2024 shows a slight deceleration with a projected growth rate of 2.3%, followed by a rebound to 2.6% in 2025.
These figures reflect the intricate web of economic factors at play, both domestically and globally, which influence the Bank’s decision-making process.
Although the overall global growth forecast resembles the July Monetary Policy Report, the distribution has shifted.
Global economic shifts and challenges in the Canadian economy
The US economy demonstrates resilience, while China’s economic performance falls short of expectations.
The euro area experiences a further slowdown in economic activity. Inflation subsides across many economies as supply constraints ease, alleviating pricing pressures amid weaker demand.
Despite this, central banks remain watchful due to lingering underlying inflation. Additionally, elevated oil prices and the Israel-Gaza conflict introduce new sources of geopolitical uncertainty.
Past Bank of Canada policy rate hikes show clear signs of slowing economic activity and alleviating inflationary pressures.
Consumption has remained subdued, marked by reduced demand for housing, durable goods, and various services. Elevated borrowing costs and weaker demand are exerting pressure on business investments.
The surge in Canada’s population mitigates labor market constraints in specific sectors and amplifies housing demand and consumption.
Despite recent job growth falling behind the expansion of the labor force, the labor market retains tight conditions with persistent wage pressures.
In summary, multiple indicators point to a convergence of supply and demand in the Canadian economy, signaling a move toward equilibrium. Economic growth, which averaged 1% in the past year, is anticipated to remain weak in the coming year.
This near-term sluggishness results from the broader impact of prior interest rate hikes and reduced foreign demand.
However, a subsequent upturn is expected, driven by increased household spending, stronger exports, and business investments influenced by improved foreign demand.
Government spending will also significantly contribute to growth throughout the projected period. The Bank foresees Canadian economic expansion at 1.2% this year, 0.9% in 2024, and 2.5% in 2025.
Recent months have witnessed fluctuating CPI inflation, with rates at 2.8% in June, 4.0% in August, and 3.8% in September.
Bank of Canada policy rate unchanged while navigating inflation challenges
The elevated Bank of Canada policy rate is tempering inflation, especially in credit-based consumer goods, and this influence is extending to services.
While food inflation is subsiding from its peak, housing costs, including mortgage interest and rent, remain elevated.
The Bank of Canada policy rate remains pivotal in assessing the economic landscape as short-term inflation expectations and corporate pricing patterns gradually return to normal. Meanwhile, wage growth persists at 4% to 5%.
The Bank’s preferred core inflation measures indicate limited signs of decreasing momentum. The Bank’s October forecast predicts CPI inflation to hover around 3½% until mid-next year, then gradually decline to 2% by 2025.
Inflation reaching the target aligns with the July projection, but the immediate trajectory is higher due to energy prices and persistent core inflation.
With a more evident impact of monetary policy in curbing spending and mitigating price pressures, the Governing Council has opted to maintain the policy rate at 5% and sustain the normalization of the Bank’s balance sheet.
Nevertheless, the Governing Council is apprehensive about the sluggish progress in achieving price stability and heightened inflation risks, remaining prepared to raise the policy rate if necessary.
The Council seeks to decrease core inflation, emphasizing the equilibrium between economic demand and supply, inflation expectations, wage growth, and corporate pricing behavior.
The Bank maintains a steadfast commitment to re-establishing price stability for the benefit of Canadians.