The Bank of Canada Keeps Rates Steady for Another Announcement

Canadian Economics

  • The Bank of Canada held 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.
  • The Bank of Canada has revised up its global GDP forecast to 2.75 per cent in 2024, and around 3 per cent for 2025 and 2026 with inflation easing gradually.
  • Stunted growth in the second half of 2023 points to the economy being in excess supply with employment growth lagging population growth and signs that wage pressures are starting to ease. The Bank of Canada forecasts economic growth to pick up within 2024.
  • The Bank is continuing with its quantitative tightening. As of this announcement, the Bank’s Government of Canada bond holdings are sitting around $246 billion.
  • CPI inflation eased to 2.8 per cent in February with easing price pressures broad-based across goods and services. Shelter price inflation remains an issue lead by growing renting and mortgage interest costs. Core measures of inflation slowed to just over 3 per cent in February. The Bank expects inflation to be around 3 per cent for the first half of the year and move below 2.5 per cent for the second half, before falling to 2 per cent in 2025.
  • The Governing Council of the Bank of Canada is committed to restoring price stability. High inflation and risks remain but price pressures have been easing in the past months and the council will be looking for evidence that this downward trend continues. The central bank is vigil of the evolution of core inflation and continues to focus on the balance of supply and demand, inflation expectations, wage growth, and corporate pricing behaviour.

Key Insights

The housing market continues to pose an upside risk to the Bank of Canada’s inflation goals. Shelter’s component of the CPI—which includes mortgage interest costs, housing prices and rent—accounts for 30 per cent of the CPI basket and remains a big player for inflation. A demand and supply mismatch has continued to stoke housing activity and kept shelter price inflation elevated. The Bank has expressed concerns that if financial conditions improve, housing demand could be stronger-than-expected as evidenced by last year’s “conditional pause” in interest hikes, which saw home sales and prices rise by 17 per cent and 7 per cent, respectively. Rejuvenated demand for housing, paired with the limited developments in housing supply, could exert significant upward pressure on inflation.

Wages have been high, but the labour market has shown signs of weakening and is expected to take some heat off wage pressures in the coming months. The employment rate has dropped for six consecutive months and the unemployment rate has steadily creeped upwards hitting 6.1 per cent in March. The number of unemployed people has risen dramatically to 1.3 million (23.0 per cent higher compared to the same time last year) in part due to layoffs but also due to Canada’s strong population growth. Job vacancies have also declined compared to one year ago, reflecting reduced production needs to satisfy consumer demand. 

The Canadian economy began 2024 with modest GDP growth but is expected to be sluggish going forward. Canada experienced broad-based month-over-month GDP growth of 0.6 per cent in January with 18 of 20 industries posting an increase. Early predictions from Statistics Canada have February’s growth, while still positive, lower at 0.4 per cent. This echoes our own predictions that monthly GDP growth will cool over the coming months due to weakness in consumer spending and business investment. Domestic demand is expected to continue to be impacted by elevated borrowing costs as the higher rates continue to work through the economy through facets such as mortgage renewals. Some respite would come from lower rates which we forecast for later this year. We believe inflation will come down enough over the next couple of months to convince the Bank of Canada to proceed with an initial rate cut of 25 basis points in June 2024.

For a better understanding of Canada’s economic outlook, please visit our, please consult our Canadian Five-Year Outlook.