In today’s decision, the Bank of Canada has opted to keep its target for the overnight rate at 5%, maintaining the Bank Rate at 5¼% and the deposit rate at 5%. This decision aligns with the Bank’s ongoing policy of quantitative tightening.
Global Economic Outlook:
The Bank anticipates continued global economic growth of approximately 3%, with gradual easing of inflation in most advanced economies. The US economy has displayed unexpected strength, supported by resilient consumption and robust business and government spending. While US GDP growth is expected to moderate in the latter half of the year, it remains stronger than previously forecasted. Similarly, the euro area is forecasted to gradually recover from its current state of weak growth. Global oil prices have experienced an upward trend, averaging approximately $5 higher than previously assumed. Despite increases in bond yields, overall financial conditions have eased due to narrower corporate credit spreads and markedly higher equity markets.
Revised Growth Forecasts:
The Bank has revised its forecast for global GDP growth to 2¾% in 2024 and around 3% in 2025 and 2026. While inflation across most advanced economies continues to decelerate, progress may be uneven. However, inflation rates are projected to align with central bank targets by 2025.
Canadian Economic Outlook:
Economic growth in Canada stalled in the latter half of the previous year, leading to an excess supply in the economy. Indicators suggest ongoing easing in labor market conditions, with employment growth lagging behind the working-age population. Notably, the unemployment rate reached 6.1% in March. Signs of moderation in wage pressures have emerged.
Forecasted Growth and Inflation:
Economic growth in Canada is anticipated to rebound in 2024, driven by robust population growth and increased household spending. Residential investment is strengthening in response to continued strong demand for housing, while government spending also contributes to growth. Business investment is expected to recover gradually, and solid growth in exports is forecasted through 2024. The Bank projects GDP growth of 1.5% in 2024, 2.2% in 2025, and 1.9% in 2026.
Inflation in Canada:
CPI inflation slowed to 2.8% in February, with broad-based easing in price pressures across goods and services. However, shelter price inflation remains elevated, primarily due to growth in rent and mortgage interest costs. Core measures of inflation have moderated to just over 3% in February. The Bank expects CPI inflation to approach 3% in the first half of this year, dip below 2½% in the latter half, and reach the 2% inflation target by 2025.
Policy Decision:
Given the economic outlook, the Governing Council has chosen to maintain the policy rate at 5% and continue normalizing the Bank’s balance sheet. Despite persistent inflationary pressures and existing risks, both CPI and core inflation have shown further signs of easing in recent months. The Council remains vigilant for sustained downward momentum, with a particular focus on core inflation, demand-supply dynamics, inflation expectations, wage growth, and corporate pricing behavior. The Bank remains steadfast in its commitment to restoring price stability for Canadians.