Bank of Canada Holds Overnight Rate – Is the End of the Buyer’s Market Near?

The Bank of Canada today held its target for the overnight rate at 4½%, with the Bank Rate at 4¾% and the deposit rate at 4½%. The Bank is also continuing its policy of quantitative tightening.

The trajectory of the global economy has mostly followed that predicted in the January Monetary Policy Report (MPR). Even though it is still too high, global growth is still slowing down, and energy price declines are mostly to blame for the declining inflation. The near-term GDP and inflation outlooks in the US and Europe are both a little better than predicted in January. Namely, the labour market is still tight and core inflation is still high. China’s growth is picking up in the first quarter. The evolution of commodity prices has broadly followed the Bank’s predictions, but the potency of China’s recovery and the effects of Russia’s conflict in Ukraine continue to be major sources of upside risk. Since January, financial circumstances have gotten tighter and the US currency has grown stronger.

In Canada, fourth-quarter economic growth was flat, less than the Bank had predicted. The GDP was less than anticipated despite rising government spending, net exports, and consumption. This was mostly due to a significant slowdown in inventory investment. Household spending is still being negatively impacted by restrictive monetary policy, and business investment has decreased as domestic and international demand has slowed.

The labour market is still extremely tight. The rate of employment growth has been shockingly high, the unemployment rate is still quite low, and the number of open positions is high. While productivity has recently decreased, wages are still growing at a rate of 4% to 5%.

As a result of slower price growth for energy, durable goods, and some services, inflation decreased to 5.9% in January. Canadians continue to suffer because of the huge price rises for food and housing. Pressures in the labour and product markets are anticipated to lessen during the next few of quarters due to the economy’s forecasted slow expansion. In addition to increasing competitive pressures, this should restrain wage rise and make it more challenging for companies to pass on greater costs to customers.

The Bank continues to anticipate that CPI inflation would decline to roughly 3% in the middle of this year, which is consistent with the most recent statistics overall. Core inflation measurements over the past year have dipped to below 5%, while 3-month measures are around 312%. To get inflation down to the 2% target, both must decline further, along with short-term inflation expectations.

Upon making its decision in January, the Governing Council stated that it anticipated keeping the policy interest rate where it is, subject to the assumption that economic developments would mostly follow the MPR projection. In light of its evaluation of recent data, the Governing Council chose to keep the policy rate at 412%. This restrictive posture is being complemented by quantitative tightening. The Governing Council is ready to raise the policy rate further if necessary to bring inflation back to the 2% target while continuing to monitor economic developments and the effects of previous interest rate hikes. The Bank is steadfast in its determination to get Canadians’ prices back under control.