Bank of Canada Maintains Steady Policy Rate amidst Global Economic Slowdown: Continues Quantitative Tightening
The Bank of Canada today announced its decision to hold its overnight rate target steady at 5%, keeping the Bank policy rate and deposit rate at 5¼% and 5% respectively. The institution is persisting with its policy of quantitative tightening amidst the global economic slowdown.
Global Economic Trends and Projections
The world economy is witnessing a slowdown with growth expected to further decelerate due to past increases in policy rates and the recent upsurge in global bond yields which are exerting pressure on demand.
According to the Bank’s projections, the global GDP growth is estimated to be 2.9% this year, tapering to 2.3% in 2024, and bouncing back slightly to 2.6% in 2025.
While growth in the Eurozone has slowed down further, inflation in most economies is beginning to ease as supply bottlenecks are being resolved and weaker demand is relieving price pressures.
Oil Prices and Geopolitical Uncertainties
Higher than expected oil prices and new sources of geopolitical uncertainty, such as the conflict in Israel and Gaza, are adding to the economic challenges.
Canadian Economic Indicators
In Canada, there are increasing indications that previous interest rate increases are curbing economic activity and alleviating price pressures. Consumer spending has been restrained, with a softer demand for housing, durable goods, and various services.
Business investment is being affected by weaker demand and increased borrowing costs. Canada’s population surge is easing labor market pressures in some sectors while contributing to housing demand and consumption.
In the job market, recent job gains have been outpaced by labor force growth and job vacancies continue to diminish. However, the labor market remains tight with persisting wage pressures.
Economic Growth Forecast
The Canadian economy, after averaging a mere 1% growth over the past year, is expected to continue on this weak growth trajectory for the coming year before picking up pace in late 2024 through 2025. The Bank of Canada projects the Canadian economy to grow by 1.2% this year, further slowing to 0.9% in 2024 before rebounding to 2.5% in 2025.
Inflation Trends
CPI inflation has been unpredictable in recent months with 2.8% in June, 4.0% in August and 3.8% in September. Higher interest rates are moderating inflation in many goods that people buy on credit, and this moderation is starting to impact services as well. Food inflation is decelerating from very high rates.
However, in addition to elevated mortgage interest costs, inflation in rent and other housing costs remains high. Near-term inflation expectations and corporate pricing behavior are only gradually normalizing, and wages are still growing at around 4% to 5%.
Inflation Projection
In the Bank’s October forecast, CPI inflation is expected to average around 3½% until the middle of next year before gradually easing to 2% in 2025.
Bank’s Policy Decision
With clearer signs that the monetary policy is moderating spending and relieving price pressures, the Bank’s Governing Council decided to hold the Bank of Canada policy rate at 5% and to continue to normalize the Bank’s balance sheet.
However, the Council is concerned that progress towards price stability is slow and inflationary risks have increased. It is prepared to raise the policy rate further if needed.
Looking Ahead
The Bank is now closely observing the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behavior.
The next scheduled date for announcing the overnight rate target is December 6, 2023. The Bank will present its next comprehensive outlook for the economy and inflation, including risks to the projection, in the MPR on January 24, 2024.
