The Bank of Canada recently announced that it will maintain its existing monetary policy, holding the overnight rate at 5%, with additional rates also remaining unchanged. As part of a broader approach towards fiscal conservatism, the Bank has committed to continue its policy of quantitative tightening. Here’s a deep dive into the Bank’s latest decision and what it means for the Canadian economy.
The Global Economic Landscape
The world economy is currently facing a slowdown, with further moderation expected. The Bank of Canada projects the global GDP growth to be at 2.9% for this year, followed by 2.3% and 2.6% for 2024 and 2025 respectively. Interestingly, the U.S. economy is showing signs of strength, whereas China’s economic performance is weaker than initially projected. Inflation rates across various economies are settling down, although central banks are maintaining their vigilance. New elements, such as rising oil prices and geopolitical tensions involving Israel and Gaza, are contributing to the existing uncertainties.
The Canadian Scenario
Within Canada, evidence suggests that prior interest rate hikes are having a cooling effect on economic activity and inflation. Consumer spending is down, particularly in the housing and durable goods sectors. Business investment is also being impacted negatively due to increased borrowing costs and weaker demand. Though Canada’s population growth has eased some labour market pressures, it has also driven up demand in the housing sector. Job gains have not kept pace with the labor force, but wage pressures continue, indicating a still-tight labor market.
Economic Projections for Canada
Growth in the Canadian economy has been sluggish, averaging just 1% over the past year. The Bank expects this tepid growth to persist into the next year, followed by a gradual increase towards the end of 2024 and into 2025. Government spending will significantly contribute to this anticipated growth. The Bank’s growth forecasts for Canada stand at 1.2% for this year, 0.9% for 2024, and an improved 2.5% for 2025.
Inflation Trends
Inflation rates have been somewhat inconsistent in recent months, with a rate of 2.8% in June, surging to 4.0% in August, and then settling at 3.8% in September. Despite this, higher interest rates have begun to temper inflation in various sectors. Although mortgage and rental costs remain elevated, food inflation appears to be stabilizing. The Bank anticipates that by mid-2024, the CPI inflation will average around 3½% before falling to a stable 2% by 2025.
Moving Forward
The Governing Council has opted to keep the policy rate at 5% and will continue to adjust the Bank’s balance sheet as part of its strategy to restore fiscal stability. However, it has expressed concerns about the slow progress towards achieving stable prices and is willing to raise interest rates further if required.
While the Bank of Canada has decided to hold its current policy steady, it is clearly committed to restoring price stability and is prepared to take action if inflationary pressures persist. Both domestic and global economic factors will be closely monitored to balance demand and supply effectively in the Canadian economy.
The coming months are crucial for policymakers as they strive to maintain equilibrium between inflation, growth, and monetary policy. Thus, whether you’re an investor, homeowner, or everyday consumer, it’s important to keep an eye on the Bank’s future decisions, as they will have far-reaching implications for the Canadian financial landscape.