The Bank of Canada 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 latest national forecast, and a result of a slowing Canadian economy.
  • Canada’s economy contracted an annualized 1.1 per cent in Q3 following 1.4 per cent growth in Q2. Consumption growth over this period was close to zero, and business investment has been essentially flat over the past year.
  • The labour market has also been cooling. Job vacancies have continued to decline, and the unemployment rate has seen a modest rise.
  • Overall, the Bank sees these Q4 data as signals the economy is no longer in excess demand.
  • The Bank is continuing with its quantitative tightening. As of this announcement, the Bank’s Government of Canada bond holdings are sitting around $280 billion.
  • CPI inflation eased to 3.1 per cent in October due to the slowdown of the economy and a drop in gasoline prices. The Bank’s preferred measures of core inflation have been around 3.5 to 4.0 per cent, with October’s data closer to the lower end of this.
  • The Governing Council remains strong in its commitment to restoring price stability saying it is prepared to raise the policy rate if necessary and wants to see further and sustained easing in core inflation. It continues to be focused on excess demand, inflation expectations, wage growth, and corporate pricing behaviour.

Key insights

Household savings have dwindled since the start of the interest rate hikes. Since the Bank began raising interest rates in March 2022, household net savings have seen considerable pullback, dropping from approximately $112 billion in the first quarter of 2022 to $81 billion in the third quarter of 2023. This reflects households’ ongoing struggle of increased interest payments and high inflation. In year-over-year terms, food and shelter saw the largest price increases in October, the latter partially a result of greater mortgage costs.

Consumer confidence continues to weaken. Since July 2023, our Index of Consumer Confidence has seen a consistent gradual decline. Only 8.0 per cent of respondents view now as a good time for a major purchase, the lowest point on record dating back to 2002. Sentiment on job prospects has also continued to tumble over this time and is now the most negative it has been since the pandemic. Higher interest rates and a slowing Canadian economy are key reasons for the stretch of weaker consumer confidence.

Interest rate hikes are likely done. With the Canadian economy contracting in the third quarter of 2023 and inflation cooling, we see the central Bank holding interest rates steady until June. By that time, we think year-over-year inflation will be in the mid 2-per cent range, allowing interest rate cuts to begin. We see the target for the overnight rate stabilizing at 2.25 per cent in 2025, higher than the pre-pandemic levels but a much welcome relief for consumers and businesses compared to today’s climate.

People walking across bridge to shopping mall, Toronto, Canada

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