Bank of Canada Upholds Policy Rate Amid Ongoing Quantitative Tightening
On January 24, 2024, the Bank of Canada announced its decision to maintain the target rate for the overnight rate at 5% while continuing its quantitative tightening policy.
Global Economic Overview
The global economic landscape is witnessing a gradual slowdown, with inflation rates easing across most economies.
United States
In the United States, economic growth has outperformed expectations, however, predictions suggest a slowdown in 2024 due to a dip in consumer spending and a decrease in business investment.
Euro Area
In the Euro area, the economic climate appears to be in a gentle contraction phase.
China
In China, low consumer confidence coupled with policy uncertainty is expected to limit economic activity.
Oil Prices
Oil prices stand approximately $10 per barrel lower than the assumed figures in the October Monetary Policy Report (MPR).
Financial Conditions
Financial conditions have seen an improvement, effectively counteracting the tightening that took place in the previous fall.
Global GDP Growth Forecast
The Bank has projected the global GDP growth to be 2½% in 2024 and 2¾% in 2025, following the 3% pace in 2023.
Inflation Rates and Central Bank Targets
With the expected softer growth this year, inflation rates in most advanced economies are expected to decrease gradually, hitting central bank targets by 2025.
Canada’s Economic Climate
In Canada, the economy has been stagnant since mid-2023 and the growth is anticipated to remain near zero through the first quarter of 2024.
Consumer Spending and Business Investment
Both consumer spending and business investment have seen a downturn in response to higher prices and interest rates.
Labour Market Conditions
Labour market conditions have lightened, with job vacancies returning to near pre-pandemic levels and new jobs being generated at a slower pace than population growth. However, wage growth is still hovering around 4% to 5%.
Economic Growth Projection
Economic growth is expected to gradually gain momentum around mid-2024.
Household Spending, Exports and Business Investment
By the second half of 2024, it is anticipated that household spending will pick up and exports and business investments will see a boost due to the recovery in foreign demand.
Government Spending
Government spending is set to significantly contribute to growth throughout the year.
GDP Growth Forecast
Overall, the Bank predicts GDP growth of 0.8% in 2024 and 2.4% in 2025, roughly unchanged from its October projection.
CPI Inflation
CPI inflation concluded the year at 3.4%. Shelter costs remain the principal contributor to above-target inflation.
Inflation Expectations
The Bank anticipates inflation to stay around 3% during the first half of the year before gradually easing, returning to the 2% target by 2025.
Policy Rate and Balance Sheet Normalization
Given the economic outlook, the Governing Council decided to maintain the policy rate at 5% and to continue the normalization of the Bank’s balance sheet.
Concerns and Commitments
The Council remains concerned about risks to the inflation outlook, especially the persistence in underlying inflation. The Bank stresses its commitment to restoring price stability for Canadians.
Future Announcements
The next scheduled date for announcing the overnight rate target is March 6, 2024. The Bank will publish its next comprehensive outlook for the economy and inflation, including risks to the projection, in the MPR on April 10, 2024.
This article is for informational purposes only and does not constitute financial advice. Always do your own research and consult with a professional before making any financial decisions.
