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The Bank of Canada To Hold the Overnight Rate at 5 per cent

Canadian Economics

By: Shane Brimacombe

  • The Bank of Canada 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 our latest national forecast, and the result of a slowing economy.
  • The Bank expects Canadian economic growth to remain weak in 2024 before picking up in 2025. They forecast GDP growth of 0.8 per cent in 2024 and 2.4 per cent in 2025, similar to our most recent national forecast of 0.6 per cent growth in 2024 and 2.3 per cent growth in 2025.
  • Higher interest rates are having the expected effect on the labour market. The unemployment rate trended upward through 2023, peaking at 5.8 per cent to round out the year.
  • The Bank is continuing with its quantitative tightening. As of today’s announcement, the Bank’s Government of Canada bond holdings are sitting just under $280 billion.
  • The Governing Council remains strong in its commitment to restoring price stability, saying that it is concerned with the persistence in underlying inflation and wants to see further easing in core CPI inflation while focusing on the balance between supply and demand in the economy, as well as inflation expectation, wage growth, and corporate pricing behaviour.

Key insights

Inflation is still on its way down despite an uptick in December. Although Statistics Canada data shows an increase to 3.4 per cent in the year-over-year change in CPI, the three-month moving average of CPI growth is down for the third consecutive month. Base year effects are playing a role as CPI as the price of gasoline fell sharply in December 2022.

Consumers are continuing to feel tougher economic conditions. Our Index of Consumer Confidence had just ticked up in its latest release but is still among its lowest since March of 2020, while our Index of Consumer Spending is nearing an all-time high. The combination of low confidence and high spending suggests that consumers are reaching for their savings to stay afloat.

Supply chain issues could rear their head again. Tensions in the Middle East pose an upside risk to inflation, as noted by today’s Monetary Policy Report. With some shipping companies diverting routes from the Red Sea—which accounts for about 12 per cent of total seaborne oil trade—a longer and more expensive trip around Africa could generate global supply shocks and push inflation upward.

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

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