The Bank of Canada Keeps Rates Steady for Another Announcement

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.