Bank of Canada maintains policy rate amidst global economic challenges

The Bank of Canada has opted to keep its policy rates unchanged. The central bank announced that it would hold the target for the overnight rate steady at 5 per cent, with the bank rate remaining at 5.25 per cent and the deposit rate at 5 per cent.

This decision underscores the Bank's commitment to the policy of quantitative tightening.

The global economic landscape has been marred by slowdowns, with projections indicating further moderation in growth.

Previous policy rate increases and the recent surge in global bond yields have begun to weigh on demand, prompting the Bank to forecast global GDP growth of 2.9 per cent this year, 2.3 per cent in 2024, and 2.6 per cent in 2025.

These figures represent a shift in the global growth outlook, with the US economy displaying resilience while economic activity in China has fallen short of expectations.

Growth in the euro area has also witnessed a deceleration, further complicating the global economic picture.

Inflation, which has been a concern for central banks worldwide, is showing signs of easing in most economies as supply bottlenecks resolve and demand softens.

However, central banks remain cautious due to persistent underlying inflation. The geopolitical uncertainty stemming from the war in Israel and Gaza has added a fresh layer of complexity to the global economic scenario.

Turning to Canada, there is mounting evidence that past interest rate hikes have subdued economic activity, particularly affecting consumption and various sectors such as housing, durable goods, and services.

Business investment has been dampened by weaker demand and higher borrowing costs.

The population surge in Canada has had a mixed impact, easing labour market pressures in some sectors while increasing housing demand and consumption.

Although recent job gains have lagged behind labour force growth and job vacancies have eased, the labour market remains on the tight side with wage pressures persisting. Overall, numerous indicators suggest that supply and demand in the Canadian economy are converging toward equilibrium.

The Bank of Canada anticipates that economic growth, which has averaged 1 per cent over the past year, will remain weak in the short term due to the impact of previous interest rate increases and slowing foreign demand.

However, a subsequent uptick is projected, driven by household spending, stronger exports, and increased business investment in response to improved foreign demand. Government spending will also contribute significantly to growth over the forecast horizon.

The Bank expects the Canadian economy to grow by 1.2 per cent this year, 0.9 per cent in 2024, and 2.5 per cent in 2025.

Canada has witnessed volatile consumer price index (CPI) inflation figures in recent months, with rates ranging from 2.8 per cent to 4.0 per cent.

Higher interest rates are contributing to a moderation in inflation, especially in goods purchased on credit, and this trend is extending to services.

Food inflation, although previously high, is showing signs of easing, but inflation in rent and other housing costs remains elevated.

The Bank's preferred measures of core inflation indicate minimal downward momentum, and near-term inflation expectations and corporate pricing behaviour are only gradually normalizing. Wages continue to grow at a rate of 4per cent to 5 per cent.

In its October projection, the Bank of Canada expects CPI inflation to average around 3.5 per cent through the middle of next year before gradually easing to 2 per cent in 2025.

Although inflation is expected to return to target around the same time as in the July projection, the near-term path is higher due to energy prices and the ongoing persistence in core inflation.

With signs that monetary policy is indeed tempering spending and alleviating price pressures, the Bank's Governing Council has opted to hold the policy rate at 5 per cent and continue the process of normalizing the Bank's balance sheet.

Nevertheless, the Governing Council remains vigilant, citing the slow progress towards price stability and heightened inflationary risks.

They are prepared to raise the policy rate further if necessary, with a focus on core inflation, the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.

The Bank of Canada reiterates its commitment to restoring price stability for Canadians, with the next scheduled date for announcing the overnight rate target set for December 6, 2023.

The Bank will release its next full outlook for the economy and inflation, along with associated risks, in the Monetary Policy Report on January 24, 2024. 

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