The Bank of Canada has announced its decision to maintain the policy rate at 5%, with the Bank Rate at 5¼% and the deposit rate at 5%.

Additionally, the Bank will continue its policy of quantitative tightening.

Source: The Bank of Canada

The global economy is experiencing a slowdown, with projected moderate growth due to previous increases in policy rates and recent spikes in global bond yields affecting demand. The Bank’s global GDP growth forecasts for this year, 2024, and 2025 are 2.9%, 2.3%, and 2.6%, respectively. Although the overall global growth outlook remains similar to the July Monetary Policy Report (MPR), there have been shifts in regional economic performance, notably with a stronger US economy and weaker economic activity in China. Growth in the euro area has also decelerated, and inflationary pressures have been easing across economies, albeit with underlying inflation persisting.

Within Canada, there are mounting indications that past interest rate hikes are tempering economic activity and reducing price pressures. Consumer spending has been restrained, with decreased demand for housing, durable goods, and various services. Business investment is negatively impacted by weaker demand and increased borrowing costs. The substantial population growth in Canada has eased labor market pressures in some sectors but contributed to elevated housing demand and consumption. The labor market, while experiencing recent job growth below labor force expansion, maintains its tightness, with persistent wage pressures. In sum, various indicators suggest that the Canadian economy is approaching equilibrium between supply and demand.

After averaging 1% over the past year, economic growth is expected to remain weak in the near term before improving in late 2024 and through 2025. The initial slowdown is attributed to the broader consequences of prior interest rate hikes and weakened foreign demand. Subsequent growth will be driven by household spending, increased exports, and heightened business investment due to improved foreign demand. Government spending is set to be a significant contributor to growth in the forecast period. Overall, the Bank anticipates the Canadian economy will grow by 1.2% this year, 0.9% in 2024, and 2.5% in 2025.

Recent months have seen volatility in CPI inflation—registering at 2.8% in June, 4.0% in August, and 3.8% in September. Elevated interest rates have been moderating inflation in many credit-financed goods and extending to services. Food inflation is receding from exceptionally high levels, although rent and other housing-related costs continue to exhibit high inflation. Near-term inflation expectations and corporate pricing behaviors are gradually normalizing, with wage growth remaining in the range of 4% to 5%. The Bank’s favored measures of core inflation indicate limited downward momentum.

In the Bank’s October outlook, CPI inflation is expected to average around 3½% until the middle of the next year, gradually easing to 2% in 2025. The timeline for inflation returning to target remains consistent with the July projection. However, the near-term trajectory is slightly higher due to energy prices and the continued persistence of core inflation.

Recognizing the signals that monetary policy is curbing spending and reducing price pressures, the Governing Council has decided to maintain the policy rate at 5% and continue the normalization of the Bank’s balance sheet. The Council, however, expresses concerns over the sluggish progress towards price stability and heightened inflationary risks. It is prepared to further raise the policy rate if necessary. The Council aims to observe a downward trend in core inflation and remains focused on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviors. The Bank is resolute in its commitment to reestablish price stability for Canadians.

Information Note

The next scheduled announcement for the overnight rate target is on December 6, 2023.

The Bank will release its next comprehensive economic and inflation outlook, including risk assessments, in the MPR on January 24, 2024.

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