Bank of Canada Rate Announcement

The Bank of Canada has decided to maintain its key overnight interest rate at 5% for the fourth consecutive time. This decision comes as the central bank remains concerned about inflation, which is higher than desired, and the economy has not slowed enough to warrant a rate cut.

The central bank focuses on addressing underlying inflation and monitoring the balance between supply and demand in the economy, inflation expectations, wage growth, and corporate pricing behavior. Bank of Canada Governor Tiff Macklem mentioned that the central bank’s discussions are shifting from whether the policy rate is restrictive enough to restore price stability to how long to stay at the current level. However, he emphasized that this does not rule out the possibility of rate increases if necessary.

While some economists anticipate a rate cut as early as April or June, Macklem did not provide a specific timeline for potential rate changes. He noted that there have been mixed economic indicators over several quarters, and the effects of previous rate hikes are still working their way through the system.

Total CPI inflation in Canada stood at 3.4% in December 2023, above the central bank’s target rate of 2%. Shelter costs were the primary contributor to inflation exceeding the target. Macklem mentioned that unexpected surges in house prices could lead to rate hikes, although this is not the central bank’s base case projection.

The decision to hold rates could boost housing market activity, leading to an active first quarter of 2024 and a strong spring market. While the central bank hasn’t set a specific timing for a rate cut, market signals point to a potential cut in either April or June.

One of the reasons for expecting a rate cut is Canada’s tepid economic growth. While the global economic outlook is brighter, the Bank of Canada has expressed concerns about ongoing geopolitical risks, such as conflicts in the Middle East and Russia-Ukraine and shipping disruptions in the Red Sea.

The central bank noted that Canada’s economy stalled since mid-2023, with growth expected to remain close to zero in the first quarter of 2024. Factors contributing to this include consumers reducing spending due to higher prices and interest rates and a contraction in business investment. However, labor market conditions have eased, with job vacancies nearing pre-pandemic levels, although new job creation is slower than population growth. Wages are still rising by approximately 4% to 5%.

The Bank of Canada anticipates that economic growth will gradually strengthen around the middle of 2024. In the second half of 2024, household spending is expected to increase, and exports and business investment should benefit from recovering foreign demand. Government spending is also anticipated to contribute to growth. Overall, the central bank forecasts GDP growth of 0.8% in 2024 and 2.4% in 2025, roughly in line with its previous projection from October.

In terms of global growth, the Bank of Canada predicts global GDP growth of 2.5% in 2024 and 2.75% in 2025. With softer growth expected this year, inflation rates in most advanced economies are projected to decrease and gradually reach central bank targets by 2025.

Important Information:

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

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