Quantitative Tightening Continues: Bank of Canada Keeps Rates Unchanged

In a continued effort to normalize its balance sheet, the Bank of Canada has opted to maintain its target for the overnight rate at 5%, alongside the Bank Rate at 5¼% and the deposit rate at 5%. This decision aligns with the Bank's ongoing strategy of quantitative tightening, aiming to manage economic growth and inflation within the country. To visualize quantitative easing, the chart below outlines the unprecedented increase in the value of Canada’s M0 money supply over the last 10 years.

Canada Money Supply M0 (source: Trading Economics) January 2024

In their announcement, the Bank of Canada highlights an ostensibly stable global economy. They note that the resilience of the US has exceeded earlier projections, driven by robust consumption and significant business and government spending. Despite expectations of a slowdown in growth later in the year, it is anticipated to remain stronger than previously forecasted. Similarly, the euro area is showing signs of a gradual recovery from its sluggish growth state.

However, amidst these positive global indicators, concerns linger. In the US, inflation accelerated in March above expectations to 3.5% citing energy and transportation costs. In Canada inflation still remains elevated at 2.8% in February, albeit with broad-based easing in price pressures. Particularly worrying is the elevated shelter price inflation due to rising rent and mortgage interest costs. As well, global oil prices have elevated beyond the assumptions made by the Bank of Canada in their January Monetary Policy Report.

US Inflation Rate 10 year (source: Trading Economics) March 2024

Another troubling economic metric is Canada’s unemployment rate, which increased to 6.1% in March. According to Statistics Canada's labour force survey, this figure represents a significant increase from February's 5.8%, marking the largest uptick in the unemployment rate in over two years. Statscan highlighted that the rise in unemployment was driven by a notable increase of 60,000 individuals actively seeking employment or facing temporary layoff.

Canadian Unemployment 1 year (source: Trading Economics) March 2024

The Bank of Canada rate has held at the same level since July 2023. As Governor Tiff Macklem said “We’ve come a long way in the fight against inflation, and recent progress is encouraging. We want to see this progress sustained”. All this aside, the question on everyone’s mind remains: we are all feeling the effects of inflation and high unemployment numbers, when will we start to see interest rates come down?

The next Bank of Canada rate announcement is June 5th, 2024.

If you have any questions about today’s Market Update, feel free to call us at 604-643-0101 or email cashgroup@cgf.com .