Bank of Canada announces interest rate decision

The Bank of Canada today announced that it would hold its target overnight interest rate at 5 per cent. The move was expected by analysts as inflation remains stubbornly higher than the central bank’s 2 per cent target rate.

Core CPI data, which filters out more volatile components of the consumer price index, came in higher than expected for December. That can be largely attributed to a shift in consumer spending away from discretionary items towards more-expensive staples. Nevertheless, the slight uptick in CPI shows that BoC Governor Tiff Macklem may want rates to stay higher for longer before making a cut.

“In Canada, the economy has stalled since the middle of 2023 and growth will likely remain close to zero through the first quarter of 2024,” the interest rate announcement reads. “Consumers have pulled back their spending in response to higher prices and interest rates, and business investment has contracted. With weak growth, supply has caught up with demand and the economy now looks to be operating in modest excess supply. Labour market conditions have eased, with job vacancies returning to near pre-pandemic levels and new jobs being created at a slower rate than population growth. However, wages are still rising around 4% to 5%.”

There is evidence that higher rates are working. Inflation had fallen rapidly from its peak above 8 per cent in 2022, before hovering above 3 per cent for the past several months. GDP growth has been stagnant to negative. As well, a recent BoC survey of consumers and businesses found that higher rates have eased inflation expectations and slowed the rate at which companies are raising prices.

There are some signs of weakness in the labour market too. Canada only created a net 100 jobs in December, despite significant population growth. On the other hand, however, wage growth remains high and unemployment hasn’t spiked significantly.

In their announcement the BoC stated they expect economic growth to resume and strengthen in the second half of 2024. They forecast overall economic growth of 0.8 per cent in 2024 and 2.4 per cent in 2025.

Forecasters have predicted that the Bank of Canada will cut interest rates sometime in the spring. Despite some of the mixed signals that we have seen so far in January, that consensus is largely intact with markets pricing in cuts within the first half of 2024. When cuts come, the expectation is that Canada will cut faster and steeper than the US Federal Reserve, largely due to more acute interest rate sensitivity in the Canadian Economy.

“Given the outlook, Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet,” the announcement reads. “The Council is still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation. Governing Council wants to see further and sustained easing in core inflation and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour. The Bank remains resolute in its commitment to restoring price stability for Canadians.”