The Bank of Canada announced on Wednesday that it is holding its target for the overnight rate at 5%, with the bank rate at 5¼% and the deposit rate at 5%. The bank is continuing its policy of quantitative tightening, which means reducing the amount of money it injects into the economy through bond purchases.
The global economy slowing down amid higher interest rates and bond yields
The Bank said that the global economy is slowing and growth is forecast to moderate further as past increases in policy rates and the recent surge in global bond yields weigh on demand. The Bank projects global GDP growth of 2.9% this year, 2.3% in 2024, and 2.6% in 2025.
While this global growth outlook is little changed from the July Monetary Policy Report (MPR), the composition has shifted, with the US economy proving stronger and economic activity in China weaker than expected. Growth in the euro area has slowed further.
Inflation has been easing in most economies as supply bottlenecks resolve and weaker demand relieves price pressures. However, with underlying inflation persisting, central banks continue to be vigilant. Oil prices are higher than were assumed in July, and the war in Israel and Gaza is a new source of geopolitical uncertainty.
Canadian economy showing signs of cooling off after interest rate hikes
The Bank said that there is growing evidence that past interest rate increases are dampening economic activity and relieving price pressures in Canada. Consumption has been subdued, with softer demand for housing, durable goods, and many services. Weaker demand and higher borrowing costs are weighing on business investment.
The surge in Canada’s population is easing labor market pressures in some sectors while adding to housing demand and consumption. In the labor market, recent job gains have been below labor force growth, and job vacancies have continued to ease. However, the labor market remains on the tight side, and wage pressures persist.
Overall, a range of indicators suggest that supply and demand in the economy are now approaching balance. After averaging 1% over the past year, economic growth is expected to continue to be weak for the next year before increasing in late 2024 and through 2025. The near-term weakness in growth reflects both the broadening impact of past increases in interest rates and slower foreign demand. The subsequent pickup is driven by household spending as well as stronger exports and business investment in response to improving foreign demand. Spending by governments contributes materially to growth over the forecast horizon.
Overall, the Bank expects the Canadian economy to grow by 1.2% this year, 0.9% in 2024, and 2.5% in 2025.
Inflation is expected to moderate as demand weakens and supply improves
The Bank said that CPI inflation has been volatile in recent months—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 is spreading to services. Food inflation is easing from very high rates. However, in addition to elevated mortgage interest costs, inflation in rent and other housing costs remains high.
The bank expects inflation to moderate as demand weakens and supply improves. The Bank projects CPI inflation to average 3.5% this year, 2.7% in 2024, and 2.1% in 2025. Core inflation measures, which exclude the most volatile components of the CPI, are also expected to decline gradually.
The Bank said that it will continue to monitor the evolution of inflation and its drivers, as well as the implications of the war in Israel and Gaza for the global and Canadian economies.
The bank maintains the policy rate and continues to reduce bond purchases
The bank said that it is maintaining its target for the overnight rate at 5%, with the bank rate at 5% and the deposit rate at 5%. The bank is also continuing its policy of quantitative tightening, which means reducing the amount of money it injects into the economy through bond purchases.
The Bank said that it will reduce its weekly net purchases of Government of Canada bonds to a target of $1 billion, down from $2 billion previously. This adjustment reflects the progress made in the economic recovery.
The Bank said that it will continue to provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation objective. The Bank will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved. The bank projects that this will happen in the second half of 2024.
The bank said that it will continue to assess the appropriate pace of bond purchases as economic conditions evolve. The bank’s quantitative easing program will continue until the recovery is well underway and will be calibrated to provide the monetary stimulus needed to support the recovery and achieve the inflation objective.
The next interest rate announcement and MPR will be on December 6, 2023.
