The Bank of Canada holds policy rate amid cooling economy

• The Bank of Canada (BoC) is holding its policy interest rate at 5 per cent for the fourth meeting in a row going back to Sept. 6, 2023
• The news aligns with signs of a Canadian economic slowdown, including a 1.1 per cent contraction in Q3 2023, lower consumer spending and contracting business investment
• The BoC expects to reach its target 2 per cent inflation rate sometime in 2025

The Bank of Canada (BoC) is holding its policy interest rate at 5 per cent for the fourth meeting in a row going back to Sept. 6, 2023. The central bank plans to continue with its quantitative tightening program amid slowing global growth, including a contraction in Europe, and expected restraint in the U.S. and China in 2024.

The news aligns with signs of a Canadian economic slowdown, including a 1.1 per cent contraction in Q3 2023 and the BoC’s expectation of near-zero growth in Q1 2024 because of lower consumer spending and contracting business investment, which has allowed supply to catch up with demand, despite wages maintaining their elevated 4-5 per cent growth rate. Other indications include:

• A recent Statistics Canada report that found savings for low-income households fell by 9.8 per cent in Q3 2023, as inflation – particularly in food and housing – outpaced wage increases and portfolio gains, forcing many to dip into savings.
• The agency also noted in their December 2023 Labour Force Survey that the unemployment rate rose by 0.8 per cent from April to November to 5.8 per cent, where it remained in December, with all major demographic groups experiencing a trend upward.

The BoC expects the economy to gain strength through 2024 on higher household spending and foreign business investment, with GDP growth of 0.8 per cent in 2024, followed by 2.4 per cent in 2025, in line with its October projection. From a broader perspective, it’s predicting global GDP growth of 2.5 per cent in 2024 and 2.75 per cent in 2025, following 3 per cent growth in 2023, with inflation rates in advanced economies, including Canada, reaching central bank targets in 2025.

The central bank has previously noted how its hawkish monetary policy is taming growth down to size, pointing out that “consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year,” as per its Dec. 6, 2023, policy rate announcement. That said, the BoC went on to specify how it “remains prepared to raise the policy rate further” if it does not see “further and sustained easing in core inflation.”

According to Wednesday’s interest rate announcement, the BoC does not believe core inflation, which excludes food and energy, is on a sustained downtrend, with shelter costs representing the largest contributor to above-target inflation.

The BoC’s view contrasts with the Canadian Federation of Independent Business’ (CFIB) notion that this easing might already be in effect, despite December’s 3.4 per cent inflation figure, up from 3.1 per cent in November, and well ahead of the target 2 per cent rate. The CFIB is forecasting that the Canadian economy contracted in Q3 and Q4 2023, meaning it entered a technical recession, though the organization expects a 0.5 per cent rebound in Q1 2024 amid strong but deteriorating sales among CFIB members. Statistics Canada will have the final word on the matter when it releases Q4 projections in February, which are likely to reflect the elevated consumer and business pessimism captured in the BoC’s Q4 2023 outlook surveys.

Join the discussion: Find out what everybody’s saying about the Bank of Canada’s policy rate decision on Stockhouse’s stock forums and message boards.

The material provided in this article is for information only and should not be treated as investment advice. For full disclaimer information, please click here.