Bank of Canada Holds Policy Rate Steady at 5% Amid Global Economic Shifts
In its most recent rate announcement, the Bank of Canada opted to maintain its target for the overnight interest rate at 5%, while keeping the Bank Rate at 5¼% and the deposit rate at 5%. The central bank is continuing its course of quantitative tightening.
In a global economic landscape marked by fluctuations, the Bank of Canada's decision was influenced by several key factors. In advanced economies, there has been a gradual reduction in inflationary pressures, although core inflation indicators have remained elevated. Major central banks worldwide are working diligently to restore stability in prices in light of these challenges.
The second quarter of 2023 saw a global slowdown in growth, largely due to a significant drop in economic activity in China. The Chinese property sector's ongoing struggles have eroded confidence and dampened growth prospects. On the other hand, the US exceeded growth expectations, driven by robust consumer spending. In Europe, a strong service sector offset a continuing contraction in manufacturing, supporting overall growth. Additionally, global bond yields increased due to increasing real interest rates, and international oil prices surpassed previous July forecasts.
Turning to Canada, the country is currently undergoing a necessary economic slowdown. In Q2 2023, economic output contracted by 0.2% annually due to weaker consumption, reduced housing activity, and widespread wildfires. Higher interest rates curtailed spending, affecting household credit growth. Government spending and increased business investment supported 1% growth in domestic demand. The labor market improved, with more job opportunities and less competition, but wage growth remained stable at 4% to 5%.
Recent Consumer Price Index (CPI) data shows persistent inflationary pressures. CPI inflation rose from 2.8% in June to 3.3% in July, aligning with the Bank's projections. Gasoline price hikes are expected to briefly boost CPI inflation. Year-over-year and three-month core inflation measures are both around 3.5%, suggesting limited recent momentum toward lower underlying inflation.
Given recent indications of easing excess demand in the economy and considering the lagged effects of monetary policy, the Governing Council has chosen to maintain the policy interest rate at 5% while continuing to normalize the Bank's balance sheet. However, the Council remains vigilant about persistent underlying inflationary pressures and is ready to raise the policy interest rate further if needed. The Bank's ongoing assessment will consider core inflation dynamics, the outlook for CPI inflation, evolving excess demand, inflation expectations, wage growth, and corporate pricing behavior.
The announcement wrapped up with the Bank reiterating its dedication to restoring price stability for Canadians. Stay tuned for the next scheduled announcement on the overnight rate target, slated for October 25, 2023.
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