Under the heading no news is good news, the Bank of Canada decided today to keep its benchmark (overnight) interest rate steady at 5.00%, putting at least a temporary hold on a policy that resulted in 10 increases stretching back to March 2022.
At the Bank’s last meeting in July, it raised the rate 0.25% due to what it said was evidence of more persistent excess demand and elevated core inflation.
Today’s announcement from the Bank struck a similar tone but with a different outcome. We highlight its latest observations below:
Canadian housing and economic performance
- Canada’s economy has entered a period of weaker growth, which the Bank says “is needed to relieve price pressures”
- Economic growth slowed sharply in the second quarter of 2023, with output contracting by 0.2% at an annualized rate, reflecting “a marked weakening” in consumption growth and a decline in housing activity, as well as the impact of wildfires in many regions of the country
- Household credit growth slowed as the impact of higher rates restrained spending among a wider range of borrowers
- Final domestic demand grew by 1% in the second quarter, supported by government spending and a boost to business investment
- “Tightness” in the labour market has continued to ease gradually, but wage growth has remained around 4% to 5%
Inflation facts and outlook
- Recent Consumer Price (CPI) data indicate that inflationary pressures remain broad based
- After easing to 2.8% in June, CPI inflation moved up to 3.3% in July, averaging close to 3% in line with the Bank’s projection
- With the recent increase in gasoline prices, CPI inflation is expected to be “higher in the near term” before easing again
- Year-over-year and three-month measures of core inflation are now both running at about 3.5%, indicating there has been little recent downward momentum in underlying inflation
- The longer high inflation persists, the greater the risk that elevated inflation becomes entrenched, making it more difficult to restore price stability
Global economic indicators
- Global growth slowed in the second quarter of 2023, largely reflecting a significant deceleration in China
- With ongoing weakness in the property sector undermining confidence, growth prospects in China have diminished
- In the United States, growth was stronger than expected, led by robust consumer spending
- In Europe, strength in the service sector supported growth, offsetting an ongoing contraction in manufacturing
- Global bond yields have risen, reflecting higher real interest rates, and international oil prices are higher than was assumed in the Bank’s July Monetary Policy Report (MPR).
Summary and outlook
In summarizing today’s decision, the Bank said “with recent evidence that excess demand in the economy is easing,” and given the lagged effects of monetary policy, Governing Council decided to hold its policy interest rate at 5% and continue to normalize the Bank’s balance sheet.
However, the Bank also noted that it remains concerned about the “persistence of underlying inflationary pressures,” and is prepared to “increase the policy interest rate further if needed.”
Governing Council noted it will continue to assess the dynamics of core inflation and the outlook for CPI inflation. In particular, it noted it will evaluate whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behavior are consistent with achieving the Bank’s 2% inflation target.
Once again, the Bank repeated its mantra of remaining “resolute in its commitment to restoring price stability for Canadians.“
Stay tuned
The Bank’s next scheduled policy announcement – the second last of 2023 – is set for October 25th.
Published by First National Financial LP