The Bank of Canada Leaves the Overnight Rate Untouched at 4.5 Per Cent

Key Insights

The Bank of Canada is continuing to hold off on any increases as the implications of their pause continue to trickle through the economy. High borrowing costs are continuing to sink in. As a result, we’ve seen marked labour changes as the public comes to terms with the increased costs. In March, job growth came in strong, with 35,000 jobs added. Among the changes seen in March, transportation and warehousing saw the most significant change in employment, growing by 40,600 jobs, while construction labour saw the most significant decline dropping 18,800 jobs. Both changes could spell good news for the Bank. The growth in transportation and warehousing could mean more expeditious product deliveries and fulfilments, which could help promote business productivity, increase the supply of goods in the market and lower consumer prices. Meanwhile, lower construction, especially as Canada heads towards its construction season, could indicate that people are responding to the high interest rates and slowing down.

Changes to the Prohibition on the Purchase of Residential Property by non-Canadians Act could impact the Bank’s inflation efforts. Passed by the federal government on June 23, 2022, and in effect since January 1, 2023, the act aimed to increase housing affordability for domestic residents by limiting the real estate market to foreign buyers. Since its launch, however, amendments have been adopted and subsequently implemented on March 27, 2023, which could significantly alter the Bank’s outlooks on housing demand, supply, and inflation. The now-in-effect amendments include allowing work permit holders to purchase homes, repealing existing provisions so the prohibition doesn’t apply to vacant land, exceptions for development purposes, and increasing the foreign corporation control threshold from 3 per cent to 10 per cent. With these changes, Canadian housing demand could find new life, and prices—which have fallen by almost 19 per cent from February year over year—could again begin to rise following a stimulated demand from newfound foreign buyers.

The Bank will likely continue closely watching our southern neighbour’s economic developments. Despite the SVB banking crisis in March, the Federal Reserve continued raising rates, with Fed Chair Jerome Powell maintaining a hawkish approach towards the inflation issue. During his Senate Banking Committee testimony, Powell indicated that further hikes—even some larger than 25 basis points—would likely be warranted as economic data such as labour continues to surprise. Continued hikes from the Fed could have their own impacts on Canada and Bank of Canada’s efforts to tame inflation. If Fed rates continue to grow while the Bank of Canada’s rates remain fixed, Canadian purchasing power will likely diminish in U.S. dollar terms. This could prove taxing for Canadian consumers through avenues such as groceries. In addition, Canada remains a top export market for U.S. agriculture, making up nearly 15 per cent or US$25 billion of their total agricultural export in 2021. With such large amounts imported, changes in Canada’s terms of trade with the U.S. could prove costly, with this cost likely felt by consumers through, among other channels, inflated grocery prices.