The Bank of Canada Holds Rates: Insights and Analysis 

The Bank of Canada has chosen to keep its target for the overnight rate at 5%, with the bank rate at 5.25% and the deposit rate at 5%. This rate is the highest since April 2001. The central bank acknowledges a stalled economy and is open to future rate hikes as it monitors slowing inflation, while also continuing its policy of quantitative tightening.

Globally, the economy is slowing down, and inflation has eased. In the U.S., growth has been more substantial than expected, led by robust consumer spending, but is likely to weaken due to past policy rate increases. In the euro area, slowing growth and lower energy prices have reduced inflationary pressures. Lower oil prices, compared to earlier assumptions in October, have also contributed to this.

In Canada, economic growth came to a standstill in the middle quarters of 2023. Real GDP contracted by 1.1% in the third quarter, following modest growth of 1.4% in the second quarter. The impact of higher interest rates is evident in the economy, as consumption growth in the last two quarters was nearly nonexistent. Business investment remained stagnant and volatile over the past year. GDP growth in the third quarter was further hindered by declines in exports and inventory adjustments. However, government spending and new home construction provided some positive momentum to the economy during this period. The labor market is easing, with slower job creation, declining job vacancies, and a modest rise in the unemployment rate. However, wages continue to rise by 4-5%. The data suggests the Canadian economy is no longer experiencing excess demand.

The slowdown in the economy has reduced inflationary pressures, with CPI inflation easing to 3.1% in October. Shelter price inflation has increased due to faster growth in rent and housing costs, along with elevated mortgage interest expenses. Core inflation measures have been around 3.5% to 4%, with recent data trending towards the lower end of this range.

The Bank of Canada’s decision to maintain the policy rate reflects its belief that monetary policy moderates spending and relieves price pressures. The central bank remains concerned about risks to inflation and is prepared to raise the policy rate further if needed. They want to see sustained easing in core inflation and continue focusing on various economic factors, with a commitment to restoring Canadian price stability.


Important Information:

Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.

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