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The Bank of Canada Decides to Hold the Overnight Rate at 5 Per Cent

Canadian Economics

By: Walter Bolduc

  • The Bank of Canada has decided to hold its target for the overnight rate at 5 per cent, with the Bank rate at 5.25 per cent, and the deposit rate at 5 per cent. This is in line with the prediction from our latest national forecast, and a result of clear signs of slowing in the consumer economy and inventory accumulation.
  • The global growth outlook has seen little change since July’s Monetary Policy Report. The Bank is projecting global GDP growth of 2.9 per cent in 2023, 2.3 per cent in 2024, and 2.6 per cent in 2025.
  • Canadian economic growth is expected to remain weak before increasing in late 2024 and through 2025. The Bank is forecasting growth of 1.2 per cent this year, 0.9 per cent in 2024 and 2.5 per cent in 2025.
  • The Bank is continuing with its quantitative tightening. As of this announcement, the Bank’s Government of Canada bond holdings are sitting around $284 billion.
  • Year-over-year CPI inflation has been volatile—2.8 per cent in June, 4.0 per cent in August, and 3.8 per cent in September. The Bank’s preferred measures of core inflation are showing little downward momentum. The Bank expects CPI inflation to average 3.5 per cent through the middle of 2024 before gradually easing to 2 per cent in 2025.
  • The Governing Council remains strong in its commitment to restoring price stability and says it wants to see downward momentum in core inflation. It continues to be focused on excess demand, inflation expectations, wage growth, and corporate pricing behaviour.

Key Insights

Household debt paired with inflation and higher rates continues to stretch budgets thin. Canada has the highest household debt among G7 countries with the ratio of credit market debt to disposable income at 1.81 in Q2 2023, signalling that households are particularly fragile to rate hikes. Naturally, the impact of higher rates is being felt by homeowners. We estimate that mortgage payments reached to 42.4 per cent of household income in the second quarter of 2023, the highest share since 1981. With interest rates expected to stay elevated for the short-term and the impacts of prior hikes continuing to mature, its unlikely household budgets will see significant improvements any time soon.

Recession fears could be self-fulfilling with the majority already expecting one. In the Bank of Canada’s Canadian Survey of Consumer Expectations for Q3 2023, they found that labour market confidence has remained strong and wage expectations are trending upwards. Despite this, 55 per cent of respondents indicated they are expecting a recession in the next year (up from 50 per cent the previous quarter). It is likely these recession fears are encouraging households to scale back their spending, a finding backed by trends seen in our Index of Consumer Spending and Index of Consumer Confidence. This additional pull-back could give the final nudge to materialize a recession within Canada.

A fast growing population could help remedy Canada’s sluggish economy. After a strong start to the year, Canada’s GDP was essentially unchanged in the second quarter, driven by a slowdown in consumer spending and further contraction in housing investment. High interest rates and inflation will ensure the slowdown persists into 2024, but record population gains will encourage a soft landing for the Canadian economy over this period. Canada currently has a target for permanent resident admissions of 465,000 for 2023 and 485,000 for 2024. New residents will stimulate Canada’s economy by filling vacant jobs and propping up consumer spending.

For more analysis of Canada’s economic outlook, visit our Canadian 5- and 20-year outlooks.

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