The Bank of Canada has announced the maintenance of its overnight rate target at 5%. This move, aligning with the Bank’s ongoing quantitative tightening strategy, reflects a nuanced response to global economic trends and domestic financial conditions.
Despite a slowing global economy and subsiding inflation, the Bank has opted for a steady approach, keeping the Bank Rate at 5¼% and the deposit rate at 5%.
This decision arrives amid varying economic indicators. In the United States, consumer spending has propelled stronger-than-anticipated growth, which is expected to decelerate due to the impact of previous rate hikes. Conversely, the Euro area exhibits weakened growth and reduced inflationary pressures, largely attributed to declining energy prices.
Canada’s own economic trajectory presents a mixed picture.
The nation witnessed a contraction in real GDP by 1.1% in the third quarter, juxtaposed with a preceding growth of 1.4% in the second quarter. Consumer spending and business investment have shown signs of restraint under higher interest rates, while government spending and new home construction have provided some economic impetus. The labor market shows signs of easing, with slower job creation and a slight uptick in unemployment, although wages continue to rise modestly.
Inflationary pressures in Canada are also on a downward trend, with October’s Consumer Price Index (CPI) inflation easing to 3.1%. Notably, shelter price inflation has surged, reflecting an increase in rent and other housing costs along with persistently high mortgage interest costs. Core inflation measures hover around 3½-4%, showing signs of easing.
In light of these developments, the Bank’s Governing Council has reaffirmed its commitment to monitoring and balancing the dynamics of demand and supply, inflation expectations, wage growth, and corporate pricing behavior. The Council remains vigilant and ready to adjust the policy rate if necessary to ensure long-term price stability for Canadians.
The next announcement regarding the overnight rate target is scheduled for January 24, 2024, coinciding with the publication of the Bank’s comprehensive economic and inflation outlook in the Monetary Policy Report.