Bank of Canada Rate Announcement

The Bank of Canada opted to maintain its overnight rate target at 5%, alongside the Bank Rate at 5.25% and the deposit rate at 5%. Upholding its stance on quantitative tightening, the Bank continues its policy course.

Global economic expansion decelerated in the fourth quarter. Although US GDP growth slowed, it remained unexpectedly strong and diverse, bolstered by robust consumption and export figures. Conversely, the Euro area experienced stagnant growth in the final quarter following a contraction in the previous one. The United States and the Euro area saw a gradual decline in inflation. Bond yields have risen since January, corporate credit spreads have narrowed, and equity markets have witnessed significant gains. Global oil prices marginally exceeded projections outlined in the January Monetary Policy Report.

In Canada, economic growth surpassed expectations in the fourth quarter, albeit sluggishly below its potential. Real GDP saw a 1% expansion after a 0.5% contraction in the preceding quarter. Consumption increased modestly by 1%, while final domestic demand contracted due to a substantial decline in business investment. Export growth provided a considerable boost. Employment growth continues to lag behind population growth, and indications suggest a potential easing in wage pressures. Overall, data indicate a modest surplus in the economy.

Consumer Price Index (CPI) inflation softened to 2.9% in January, primarily driven by moderating goods price inflation. Elevated shelter price inflation remains a significant contributor to overall inflation. Underlying inflationary pressures persist, with year-over-year and three-month core inflation measures ranging between 3% to 3.5%. While the portion of CPI components growing above 3% declined, it remains above historical averages. The Bank anticipates inflation to hover near 3% in the first half of the year before gradually subsiding.

In the press conference following the rate announcement, the Bank of Canada Governor Tiff Macklem expressed concerns about global risks, such as attacks on Red Sea shipping routes, potentially leading to higher inflation. Macklem emphasized the need to allow higher interest rates more time to have an impact, acknowledging that monetary policy works slowly and indirectly. While discussions have shifted from the restrictiveness of policy to its duration, it’s too early to consider rate cuts. Future progress on inflation is anticipated to be gradual and uneven. The Bank remains steadfast in its commitment to reestablishing price stability for Canadians.


Important Information: 

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

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