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The Bank of Canada Holds 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 a slowing Canadian economy.
  • Global economic growth slowed in the fourth quarter of last year.
  • Statistic Canada’s most recent Daily shows Canada’s economy expanded in the fourth quarter, albeit at a weak pace and below potential, in part due to a strong increase in exports. Real GDP advanced 0.2 per cent after contracting 0.1 per cent in the third quarter. Final domestic demand contracted due to large business investment decline.
  • Data from the final quarter of 2023 points to the economy being in excess supply with employment growth lagging population growth and signs that wage pressures are possibly alleviating.
  • The Bank is continuing with its quantitative tightening. As of this announcement, the Bank’s Government of Canada bond holdings are sitting around $270 billion.
  • CPI inflation eased to 2.9 per cent in January. Shelter price inflation is the biggest contributor. Year-over-year and three-month measures of core inflation are within 3 per cent to 3.5 per cent. The Bank expects inflation to be around 3 per cent for the first half of the year.
  • The Governing Council remains strong in its commitment to restoring price stability. The council is concerned about risks to the inflation outlook, particularly persistent underlying inflation, and wants to see further and sustained easing in core inflation. It continues to be focused on the balance of supply and demand, inflation expectations, wage growth, and corporate pricing behaviour.

Key Insights

Initial interest rate cuts could be softer than previously expected. Real GDP growth was essentially flat in October, then grew 0.2 per cent in November before stalling again in December. The result was a modest gain of 0.2 per cent in the fourth quarter of last year, thus avoiding a technical recession, defined as two consecutive quarters of negative GDP growth. This positive news may shift some Canadians’ outlooks towards softer than initially expected interest rate cuts and pace of price deceleration.

Consumers are pulling back spending. The Bank of Canada’s 2023 fourth quarter survey of consumer expectations indicated that compared to the third quarter of 2023, an increasing number of consumers feel they are worse off due to higher interest rates and that the impact to their spending is just beginning. Consumers have found various ways to curtail their spending such as buying only essentials and shopping sales. Still, the share of consumers that believe they are worse off will likely continue to rise as mortgages continue renewing. That said consumers also are expecting price growth to lessen for several goods including food, rent, and gasoline.

Housing demand is growing along with expectations for rate cuts. Despite the overall negative sentiment in consumer expectations, the Bank’s 2023 fourth quarter survey of consumer expectations shows a growing number of both newcomers (up 10 percentage points from the third quarter) and renters (up almost 6 percentage points from the third quarter) that are planning to or thinking of buying a home in the coming year. This increase likely reflects pent-up demand due to the higher rates of the past couple of years. This could be worrisome for the Bank as an increase in demand might continue to put upward pressure on the mortgage interest cost index – which rose almost 30 per cent in 2023 – despite potential cuts to interest rates.

Visit our GrowthNow for a real-time forecast of Canada’s economic growth.

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