The Bank of Canada decides to hold the Overnight Rate at 5 per cent

Canadian Economics

  • 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 summer economic forecast, and a result of clear signs of slowing in the consumer economy and inventory accumulation.
  • Canadian economy has entered a period of weaker growth. The second quarter of 2023 saw an output contraction of 0.2 per cent at an annualized rate reflecting weaker consumption growth, decline in housing activity, and wildfire impacts.
  • The Bank is continuing with its quantitative tightening. Since the last announcement in July, the Bank’s Government of Canada bond holdings have declined from around $317 billion to around $284 billion.
  • CPI inflation in June reached 2.8 per cent in June, and 3.3 per cent in July. When averaged, this remains in line with the Bank’s projection. Due to elevated gasoline prices, the Bank expects CPI inflation to remain higher in the near term before easing. The Bank remains concerned that CPI inflation could stall in returning to 2 per cent, seeing little downward movement in underlying inflation with year-over-year and three-month measures of core inflation at 3.5 per cent.
  • The Governing Council says it will continue to assess core inflation and CPI inflation outlooks while evaluating the evolution of excess demand, inflation expectations, wage growth, and corporate pricing behaviour to ensure they remain aligned with the Bank’s inflation goals.

Key Insights

Consumer and business confidence have reached their lowest levels since the pandemic. Since the first interest rate hike in March 2022, a discernible erosion in both consumer and business confidence has occurred. Notably, our Index of Consumer Confidence index has presented a downward trend, plummeting from an initial score of 95.3 at the onset of the rate hikes to 61.2 as of last month. Likewise, our Index of Business Confidence has mirrored this regression, declining from a score of 80.7 in the first quarter of 2022 to 71.5 by the second quarter of 2023. As the previous hikes’ effects continue to mature, it is likely Canada’s consumer and business confidence will remain low for the short-term period.

Inflation expectations have trended towards the Bank’s target range. As the influence of interest rates has proliferated through the economic landscape, the outlook on inflation among Canadians has gradually realigned with the Bank’s prescribed target range of 1 to 3 per cent. According to a series of Conference Board of Canada surveys administered by Leger, the percentage of individuals anticipating inflation to fall within this range in the coming twelve months has surged from 22.9 per cent in November 2022 to 39.6 per cent in August 2023. Likewise, expectations over a three-year horizon have climbed from 34.7 per cent to 40.9 per cent. This upswing presents a favorable indicator for the Bank and its inflation objectives. This movement may suggest that expectations have not become anchored above the desired range, and perhaps more importantly that drastic policy interventions may not be necessary to attain their stated inflation goal.

The majority already believe we are in a recession. Leger’s recent North American Tracker survey, published on September 1st, underscores that a significant majority of Canadians (61 per cent) perceive the country to be currently experiencing an economic recession. Furthermore, 47 per cent of respondents indicated financial struggle, and 38 per cent expressed concerns about potential job loss. In August, reflecting many of these apprehensions, our Index of Consumer Confidence registered its lowest level since the beginning of the pandemic. Nationally, respondents have trended towards pessimism, reporting diminished outlooks on their present and future financial situations, as well as on prospective employment opportunities. Paradoxically, this prevailing pessimism among consumers may have a mitigating effect on inflation. As concerns related to personal finances and employment intensify, there is an anticipated shift towards greater savings and reduced spending, thereby constraining demand and exerting a downward influence on inflationary pressures.

glass buildings with reflections in the financial district of toronto

To better understand how the rate hikes, as well as other economic events have impacted business confidence, please visit our Index of Business Confidence.