Bank of Canada Upholds Policy Rate, Continues With Quantitative Tightening Approach
The Bank of Canada has decided to maintain its overnight rate target at 5%, alongside the Bank Rate at 5¼%, and the deposit rate at 5%. The Bank is persevering with its strategy of quantitative tightening in the face of a slowing global economy and further easing inflation.
The worldwide economy is losing momentum, with inflation experiencing a further decline. The United States, however, has showcased stronger growth than anticipated, primarily driven by significant consumer spending. However, predictions suggest a potential weakening in the forthcoming months as previous policy rate increases begin to affect the economy.
In contrast, the Eurozone has registered a weakening growth rate. Combined with declining energy prices, inflationary pressures have been alleviated. In the oil market, prices are approximately $10-per-barrel lower than what was assumed in the October Monetary Policy Report (MPR).
Financial conditions have seen an easing, with long-term interest rates unravelling some of the sharp increases observed earlier in the autumn. The US dollar has depreciated against most currencies, including the Canadian dollar.
In Canada, economic growth stagnated during the middle quarters of 2023. Real GDP saw a contraction rate of 1.1% in the third quarter, following a growth of 1.4% in the second quarter. The rise in interest rates is evidently curbing spending; consumption growth in the last two quarters was nearly zero, with business investment showing signs of volatility but essentially remaining flat over the past year.
The labour market continues to relax; job creation has been slower than labour force growth, job vacancies have further declined, and the unemployment rate has seen a modest rise. Despite these factors, wages are still increasing by 4-5%.
The deceleration in the economy is reducing inflationary pressures across a broad range of goods and services prices. This, coupled with the drop in gasoline prices, contributed to the easing of CPI inflation to 3.1% in October.
Shelter price inflation has seen an uptick, reflecting faster growth in rent and other housing costs along with the continued contribution from elevated mortgage interest costs.
In recent months, the Bank’s preferred measures of core inflation have been around 3½-4%, with the October data coming in towards the lower end of this range
Observing further signs that monetary policy is moderating spending and relieving price pressures, the Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet. The Council remains concerned about risks to the inflation outlook and is prepared to raise the policy rate further if needed.
The focus of the Governing Council is to see further and sustained easing in core inflation, and it continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour. The Bank stays steadfast in its commitment to restoring price stability for Canadians.
The next scheduled date for announcing the overnight rate target is January 24, 2023. Along with this, the Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR at the same time.
