The Bank of Canada cited the ongoing risk of inflation for its decision to maintain its overnight benchmark interest rate at 5.0%.
We summarize the Bank’s observations below, including its forward-looking comments on the state of the economy, inflation and interest rates.
Canadian inflation
- CPI inflation ended the year at 3.4% and the Bank expects inflation to remain close to 3% during the first half of 2024 “before gradually easing” and returning to the Bank’s 2% target in 2025
- Shelter costs remain “the biggest contributor to above-target inflation”
- While a slowdown in demand is said by the Bank to be reducing price pressures in a broader number of CPI components and corporate pricing behaviour continues to normalize, core measures of inflation are not showing sustained declines
Canadian economic performance and outlook
- The Bank notes that the Canadian economy has “stalled” since the middle of 2023 and believes growth will likely remain close to zero through the first quarter of 2024
- Consumers have pulled back their spending in response to higher prices and interest rates, and business investment has contracted
- With weak growth, supply has caught up with demand and the economy now looks to be operating in modest excess supply
- Labour market conditions have eased, with job vacancies returning to near pre-pandemic levels and new jobs being created at a slower rate than population growth. However, wages are still rising around 4% to 5%
Global economic performance and outlook
- Global economic growth continues to slow, with inflation easing “gradually” across most economies
- While growth in the United States has been stronger than expected, it is anticipated to slow in 2024, with weakening consumer spending and business investment
- In the euro area, the economy looks to be in a mild contraction
- In China, low consumer confidence and policy uncertainty will likely restrain activity
- Oil prices are about $10 per barrel lower than was assumed in the Bank’s October Monetary Policy Report (MPR)
- Financial conditions have eased, largely reversing the tightening that occurred last autumn
- The Bank now forecasts global GDP growth of 2.5% in 2024 and 2.75% in 2025 compared to 2023’s 3% pace
- With softer growth this year, inflation rates in most advanced economies are expected to come down slowly, reaching central bank targets in 2025
Outlook
The Bank believes that Canadian economic growth will strengthen gradually “around the middle of 2024.” Furthermore, it expects household spending will likely “pick up” in the second half of 2024, and exports and business investment should get a boost from recovering foreign demand.
The Bank also suggests that continued “spending by governments” will contribute “materially” to economic growth in Canada through the year. Overall, the Bank forecasts GDP growth of 0.8% in 2024 and 2.4% in 2025, roughly unchanged from its October projection.
Taking all of these factors and forecasts into account, the Bank’s Governing Council decided to hold its policy rate at 5% and to continue to “normalize” the Bank’s balance sheet.
The Bank’s statement went on to note that Council “is still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation” and wants to see “further and sustained easing in core inflation.” The Bank also said it continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.
As it has said consistently over the past year, the Bank will remain “resolute in its commitment to restoring price stability for Canadians.”
Although the Bank did not say it, the bottom line is we will have to wait and see what comes next.
Next touchpoint
March 6, 2024 is the Bank’s next scheduled policy interest rate announcement. First National will provide an executive summary immediately following. For other capital market insights in between, please visit the Resources page of our website.