The Bank of Canada announced today that it will keep the target for the overnight rate at 5%. The Bank Rate is correspondingly 5¼%, and the deposit rate is at 5%. Furthermore, the Bank continues its policy of quantitative tightening.

Global Economic Slowdown and Its Effects

Global economic expansion slowed in the fourth quarter. The growth of the United States' Gross Domestic Product (GDP) also decelerated but remained surprisingly robust and widespread, supported by strong contributions from consumption and exports. In the Eurozone, economic growth was stagnant at the end of 2023, following a contraction in the third quarter. Inflation continued to decrease in the United States and the Eurozone. Bond yields have risen since January, while corporate bond spreads have narrowed. Equity markets have made significant gains. Global oil prices slightly exceed the levels assumed in the January Monetary Policy Report.

Canada's Economic Performance

In Canada, economic expansion in the fourth quarter exceeded expectations, though the pace remained slow and below potential. Real GDP grew by 1%, after a 0.5% contraction in the third quarter. Consumption increased by only 1%, and final domestic demand contracted due to a significant decline in business investment. A strong increase in exports boosted growth. Employment continues to grow more slowly than the population, and there are now signs that wage pressures could be easing. Overall, the data suggest that the economy has a modest excess supply.

Inflation Dynamics and Policy Implications

The Consumer Price Index (CPI) inflation fell to 2.9% in January, with the increase in goods prices moderating further. The rise in housing costs remains high and is the most significant contributor to inflation. Underlying inflationary pressures persist: one-year and three-month core inflation measures are in the range of 3 to 3.5%, and while the share of CPI components growing above 3% has declined, it remains above the historical average. The Bank still expects inflation to hover near 3% in the first half of 2024 before gradually declining.

Bank of Canada's Continued Vigilance

The Governing Council has decided to maintain the policy rate at 5% and to continue normalizing the Bank's balance sheet. It remains concerned about the risks surrounding the inflation outlook, especially the persistence of high underlying inflation. The Governing Council wants to see core inflation continue to decline sustainably. It is closely monitoring the balance between supply and demand, inflation expectations, wage growth, and corporate pricing practices. The Bank is determined to restore price stability for the Canadian population.

Note to readers: The next overnight rate target announcement will be on April 10, 2024. The Bank will publish its next full economic and inflation outlook, along with an analysis of associated risks, in the Monetary Policy Report, which will also be released on that date.

Bank of Canada's Strategy and Future Outlook

In the face of nuanced economic circumstances, the Bank of Canada's Governing Council has opted to maintain the overnight rate target at 5%, continuing its policy of quantitative tightening. This decision reflects a cautious approach aimed at balancing the need to control inflation while supporting stable economic growth. The decision to keep rates steady is indicative of the Bank's ongoing concern about persistent core inflation, despite a general decrease in overall inflation.

The Bank of Canada emphasizes the importance of seeing core inflation continue to decrease sustainably. In this context, closely monitoring the balance between supply and demand, inflation expectations, wage growth, and corporate pricing practices becomes crucial. The Bank remains committed to restoring price stability for the Canadian populace.

Implications for Consumers and the Housing Market

The repercussions of these monetary policies directly impact consumers and the housing market. The sustained increase in interest rates over the past years has weighed on borrowing capacities and housing demand. However, the expected stabilization of inflation and the anticipation of potential rate cuts could reinvigorate the market. The responsiveness of the housing market to these adjustments will be key to assessing the effectiveness of the Bank of Canada's measures.

Conclusion

The Bank of Canada's decision to keep the policy rate at its current level and to continue with quantitative tightening comes against a backdrop of changing global economic conditions. Although the Canadian economy shows signs of resilience, caution remains paramount in the face of global uncertainties and domestic challenges. The coming months will be critical to assess the impact of monetary policy on inflation, growth, and housing affordability in Canada. The next meeting on April 10, 2024, will be a pivotal moment, offering new insights into the country's economic trajectory.