Bank of Canada Keeps Interest Rates Steady Amidst Slower Economy

The Bank of Canada has decided to maintain its current interest rates, signalling its commitment to the ongoing policy of quantitative tightening. The target for the overnight rate remains at 5%, with the Bank Rate at 5.25%, and the deposit rate at 5%. This decision comes against the backdrop of a global economy experiencing a slowdown, with inflation showing signs of easing.

In the United States, economic growth has been stronger than expected, primarily due to robust consumer spending. However, it is anticipated that this growth will weaken in the coming months as the impact of previous interest rate increases filters through the economy. In the Eurozone, economic growth has also slowed down, exacerbated by lower energy prices, which have tempered inflationary pressures. Oil prices have fallen by about $10 per barrel compared to projections made in the October Monetary Policy Report. Financial conditions have loosened as long-term interest rates have eased, partially reversing the sharp increases seen earlier in the year. Additionally, the U.S. dollar has weakened against most major currencies, including the Canadian dollar.

Within Canada, the economy experienced stagnation in the middle quarters of 2023. Real GDP contracted by 1.1% in the third quarter, following a 1.4% growth in the second quarter. The impact of higher interest rates on spending is evident, as consumer spending growth in the past two quarters has been nearly flat. Business investments have been volatile but essentially unchanged over the past year. Exports and inventory adjustments hurt GDP growth in the third quarter, while government spending and new home construction provided a boost. The labour market has softened, with job creation trailing behind labour force growth, job vacancies decreasing, and a modest increase in the unemployment rate. Nonetheless, wages have continued to rise at a rate of 4-5%. Collectively, these economic indicators suggest that there is no longer an excess of demand in the economy.

The economic slowdown has had a dampening effect on inflationary pressures across a broader spectrum of goods and services. Coupled with the decline in gasoline prices, this has contributed to a decrease in CPI inflation to 3.1% in October. However, inflation in housing costs, particularly rent and mortgage interest, has increased. In recent months, the Bank's preferred measures of core inflation have ranged from 3½-4%, with the October data leaning towards the lower end of this range.

Given the signs that monetary policy is curbing spending and alleviating price pressures, the Governing Council has chosen to maintain the policy rate at 5% and continue normalizing the Bank's balance sheet. The Governing Council remains cautious about inflation risks and is prepared to raise the policy rate further if necessary. They are keen on observing sustained decreases in core inflation and will closely monitor the balance between supply and demand in the economy, inflation expectations, wage growth, and corporate pricing behaviour. The Bank reiterates its commitment to restoring price stability for Canadians.

In summary, the Bank of Canada's recent decision to keep interest rates unchanged reflects a response to the global economic slowdown and moderate inflationary pressures. Their focus remains on maintaining a balanced economic environment while safeguarding against excessive price increases.

Posted by Maryann Jones on


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