Bank of Canada maintains policy rate, continues quantitative tightening

With the Bank Rate at 5¼% and the deposit rate at 5%, the Bank of Canada today maintained its objective for the overnight rate at 5%. Additionally, the Bank is keeping up its quantitative tightening strategy.

Major central banks are still concentrating on reestablishing price stability despite the fact that inflation in advanced nations has continued to decline and measures of core inflation are still high. The second quarter of 2023 saw a slowdown in global growth, which was mostly caused by a severe slowdown in China. Confidence being undermined by continuous downturn in the real estate market, China’s economic prospects are now less favorable. Growth in the US outperformed expectations, driven by strong consumer spending. In Europe, growth was backed by the service sector’s strength, which countered the industrial sector’s continuous decline. 

International oil prices are higher than was anticipated in the July Monetary Policy Report (MPR), and global bond yields have increased as a result, reflecting higher real interest rates.

The Canadian economy has begun a phase of slower growth, which is necessary to ease pressure on prices. The second quarter of 2023 saw a dramatic slowdown in economic growth, with output declining by 0.2% on an annualized basis. This was caused by a sharp slowdown in consumption growth, a drop in housing activity, the effects of wildfires across the nation, and other factors. As a result of increasing rates’ influence on spending restraint among a wider spectrum of borrowers, household credit growth slowed. During the second quarter, final domestic demand increased by 1% thanks to government spending and an increase in business investment.

The labor market’s tightness has progressively continued to loosen. Wage growth, meanwhile, has been constant at 4% to 5%. Recent CPI data show that widespread inflationary pressures are still there. Following a decline to 2.8% in June, CPI inflation increased to 3.3% in July, averaging close to 3%, as predicted by the Bank. As a result of the recent rise in gas prices, CPI inflation is anticipated to be higher in the short term before declining once more. Both the three-month and year-over-year measures of core inflation are currently hovering around 3.5%, which suggests there hasn’t been any recent downward momentum in underlying inflation. The risk that rising inflation may become entrenched and make it harder to restore price stability increases with the length of time that high inflation continues.

The Governing Council decided to maintain the policy interest rate at 5% and continue to normalize the Bank’s balance sheet in light of recent signs that the economy’s excess demand is abating as well as the lagged impacts of monetary policy. The Governing Council is ready to raise the policy interest rate further if necessary, but it is nonetheless concerned about the underlying inflationary pressures’ persistence. The dynamics of core inflation and the prospects for CPI inflation will continue to be evaluated by the Governing Council. Examining whether the development of excess demand, inflation expectations, wage growth, and business pricing behavior are consistent with hitting the 2% inflation objective will be a specific focus. The Bank is steadfast in its determination to get Canadians’ prices back under control.

The next time the overnight rate goal will be revealed is on October 25, 2023. The Bank will simultaneously release its next comprehensive view for the economy and inflation in the Monetary Policy Report, together with any risks to the prediction.


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