The Bank of Canada held its target for the overnight rate at 5%, with the Bank Rate at 5.25% and the deposit rate at 5%. The Bank is continuing its policy of quantitative tightening. The Bank expects the global economy to grow at about 3%, with inflation in most advanced economies gradually easing.
The US economy has again proven stronger than anticipated, buoyed by resilient consumption and robust business and government spending. US GDP growth is expected to slow in the second half of this year but remains stronger than forecast in January. The euro area is projected to recover gradually from its current weak growth. Global oil prices have increased, averaging about $5 higher than the January Monetary Policy Report (MPR) assumed. Since January, bond yields have increased, but overall financial conditions have eased with narrower corporate credit spreads and sharply higher equity markets. The Bank revised its global GDP growth forecast to 2.75% in 2024 and about 3% in 2025 and 2026. Inflation continues to slow across most advanced economies, although progress will likely be bumpy. Inflation rates are projected to reach central bank targets in 2025.
In Canada, economic growth has faced challenges, stalling in the second half of last year and moving into excess supply. This is evident from a broad range of indicators that suggest labor market conditions are continuing to ease. Employment growth has been slower than the working-age population, leading to a gradual rise in the unemployment rate, which reached 6.1% in March. However, some recent signs show that wage pressures are moderating, indicating a potential shift in the labor market.
Economic growth is forecast to pick up in 2024. This primarily reflects both strong population growth and a recovery in household spending. Residential investment is strengthening, responding to continued robust demand for housing. The contribution to growth from government spending has also increased. Business investment is projected to recover gradually after considerable weakness in the second half of last year. The Bank expects exports to continue to grow solidly through 2024. The Bank forecasts GDP growth of 1.5% in 2024, 2.2% in 2025, and 1.9% in 2026. The strengthening economy will gradually absorb excess supply through 2025 and into 2026.
CPI inflation slowed to 2.8% in February, with easing in price pressures becoming more broad-based across goods and services. However, shelter price inflation is still very elevated, driven by growth in rent and mortgage interest costs. Core measures of inflation, which had been running around 3.5%, slowed to just over 3% in February, and 3-month annualized rates suggest downward momentum. The Bank expects CPI inflation to be close to 3% during the first half of this year, move below 2.5% in the second half, and reach the 2% inflation target in 2025.
Based on the outlook, the Governing Council held the policy rate at 5% and continued normalizing the Bank’s balance sheet. While inflation is still too high and risks remain, CPI and core inflation have eased further in recent months. The Council will be looking for evidence that this downward momentum is sustained. The Governing Council is particularly watching the evolution of core inflation and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behavior.
https://www.bankofcanada.ca/2024/04/fad-press-release-2024-04-10
https://www.bankofcanada.ca/multimedia/press-conference-monetary-policy-report-april-2024
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Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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