On Wednesday, The Bank of Canada decided to maintain its target interest rate while emphasizing its commitment to achieving a 2% inflation target. The overnight rate remains at 5%, the bank rate at 5.25% and the deposit rate at 5%. The Bank of Canada is also continuing its policy of quantitative tightening. Inflation in advanced economies is decreasing, but core inflation remains high, leading major central banks to prioritize price stability. Global growth has slowed, primarily due to China’s economic slowdown and issues in its property sector. The U.S. experienced stronger-than-expected growth, driven by robust consumer spending, while Europe saw growth in the service sector but a contraction in manufacturing. Global bond yields have risen, reflecting higher real interest rates, and international oil prices are higher than anticipated.
Canada’s economy is facing weaker growth, which is seen as necessary to alleviate inflationary pressures. Economic growth slowed in the second quarter of 2023 due to reduced consumption, declining housing activity, wildfires and the impact of higher interest rates. Household credit growth also slowed due to higher rates restraining spending. Recent data shows widespread inflationary pressures, with CPI inflation averaging around 3%. Core inflation measures indicate little downward momentum. The Bank of Canada is concerned about persistent inflation but maintains the policy interest rate at 5%, with the option to raise it further if necessary. They will continue to assess factors like inflation expectations and wage growth to achieve its 2% inflation target. The Bank of Canada remains committed to restoring price stability for Canadians.
In a speech this afternoon to the Calgary Chamber of Commerce, Governor Tiff Macklem explained the Bank of Canada’s emphasis on the importance of the 2% inflation target, which has been the cornerstone of monetary policy since 1995. Members argue against changing the target or accepting higher inflation, stating that maintaining it provides stability and confidence to households and businesses. They discuss the ongoing balance between supply and demand in the economy and express concern about the persistence of inflationary pressures.
The labor market is closely monitored, with signs of cooling labor demand allowing supply to catch up, although wage growth remains high.
Governor Macklem also highlighted the Bank of Canada’s need to review its monetary policy framework, including the 2% inflation target, every five years to ensure it remains suitable for the evolving economic landscape. He stressed that this framework has served Canada well, providing low and stable inflation and supporting economic performance.
In conclusion, the Bank of Canada reiterates its dedication to achieving the 2% inflation target. It acknowledges the challenges of higher interest rates while emphasizing the importance of price stability for Canadians’ well-being. They remain vigilant in assessing the economy and stand ready to take further action, if required, to achieve their policy goals.
Sources:
https://www.bankofcanada.ca/2023/09/fad-press-release-2023-09-06/
https://www.bankofcanada.ca/2023/09/economic-progress-report-target-in-sight-but-were-not-there-yet/
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