The Bank of Canada has announced its decision to maintain its target for the overnight rate at 4½%, which is great news for the Canadian economy. The Bank Rate will remain at 4¾%, and the deposit rate at 4½%. Moreover, the Bank’s policy of quantitative tightening will continue, further supporting its commitment to price stability.
The Bank’s decision comes at a time when the global economy is showing signs of improvement. Inflation in many countries is easing, thanks to lower energy prices, normalizing global supply chains, and tighter monetary policy. While labor markets in many advanced economies remain tight, the measures of core inflation suggest persistent price pressures, especially for services.
Despite some expected weakening in the United States and Europe as tighter monetary policy continues to impact these economies, global economic growth has been stronger than anticipated. Meanwhile, China’s economy has rebounded, particularly in services, and commodity prices are close to their January levels.
Canada’s economy, too, has shown remarkable resilience. Demand is still exceeding supply, and the labor market remains tight. Economic growth in the first quarter looks to be stronger than projected in January, with a bounce in exports and solid consumption growth. The Bank’s Business Outlook Survey suggests that acute labor shortages are starting to ease, and strong population gains are supporting employment growth while also boosting aggregate consumption. Housing market activity remains subdued.
As more households renew their mortgages at higher rates and restrictive monetary policy works its way through the economy, consumption is expected to moderate this year. Softening foreign demand is expected to restrain exports and business investment. GDP growth is projected to be weak through the remainder of this year before gradually strengthening next year. However, the Bank’s current projection is for Canada’s economy to grow by 1.4% this year and 1.3% in 2024 before picking up to 2.5% in 2025, which is a positive sign for the Canadian economy.
The Bank’s preferred measures of core inflation were just under 5%, and CPI inflation eased to 5.2% in February. The Bank is confident that CPI inflation will fall quickly to around 3% in the middle of this year and then decline more gradually to the 2% target by the end of 2024. Recent data is reinforcing the Bank’s confidence that inflation will continue to decline in the next few months.
Given the positive outlook for growth and inflation, the Bank has decided to maintain the policy rate at 4½%. The Bank’s policy of quantitative tightening will also continue, which complements its restrictive stance. The Bank is committed to restoring price stability for Canadians and is prepared to raise the policy rate further if needed to return inflation to the 2% target. The Governing Council will be closely monitoring indicators such as core inflation and the evolution of CPI inflation to gauge the progress of inflation returning to the target.
Overall, the Bank’s decision is a positive sign for the Canadian economy, and its commitment to price stability is reassuring for businesses and consumers alike.