Bank of Canada's Firm Stance Amid Economic Stall

The Bank of Canada's decision to maintain the key overnight interest rate at five percent aligns with expectations amid signs of economic slowdown and rising unemployment. The central bank emphasized its commitment to moderating spending and relieving price pressures.

Inflation Concerns Persist

While opting for a hold in the interest rate, the Bank of Canada remains vigilant about inflation concerns. It signaled its readiness to raise rates further if needed, contingent on factors such as sustained easing in core inflation, wage growth, and corporate pricing behavior.

Economic Trends and Future Rate Changes

Economists expect that if current economic trends persist, the Bank of Canada might consider lowering interest rates by next spring. James Orlando of Toronto-Dominion Bank suggests an interest rate cut is likely in April, with the central bank maintaining a cautious stance in the interim.

Caution for Businesses and Households

Andrew DiCapua, senior economist at the Canadian Chamber of Commerce, advised caution against premature optimism about rate cuts, particularly before the second quarter. Rising mortgage interest payments and significant debt refinancing challenges for businesses could exert pressure on Canadian families and restrain spending.

Economic Overview

Canada's economic growth has stalled, contracting at a rate of 1.1% in the third quarter of 2023. Higher interest rates are identified as a key factor restraining spending, with consumption growth close to zero. The Bank of Canada recognizes the impact on the labour market, where job creation is slower than labour force growth, resulting in a modest rise in the unemployment rate.

Inflationary Pressures and Global Economic Trends

The slowdown in the economy has contributed to easing inflationary pressures, with shelter price inflation being an outlier. Core inflation, the Bank's preferred measure, has hovered around 3.5 to four percent.

On the global front, the Bank noted a continued slowing of the global economy and easing inflation. While the U.S. has experienced stronger-than-expected growth, the Bank anticipates a cooling in the coming months due to past policy rate increases. The euro area has already weakened, further reducing inflationary pressures.

Looking Ahead

The Bank of Canada will make its next key interest rate announcement on January 24, 2024, along with a comprehensive outlook for the economy and inflation.

In a move that was widely anticipated, the Bank of Canada has decided to maintain its benchmark interest rate at five percent. This decision marks the second consecutive time that the central bank has chosen to keep rates unchanged. It's a signal that the Bank might be shifting to the sidelines after a series of rate hikes over the past year.

These rate hikes were introduced to combat soaring inflation, which reached its highest level in 40 years. The Bank raised interest rates ten times in response, taking the cost of borrowing from virtually zero percent to the current five percent. This aggressive approach was successful in taming inflation, reducing it from 8.1 percent in the summer of 2022 to 3.8 percent last month.

Bank of Canada's Inflation Concerns

The Bank acknowledges that inflation appears to be moving in the right direction. However, it remains cautious, emphasizing that the inflationary pressures have not been entirely eliminated. The Bank's statement highlights the effects of past interest rate hikes on economic activity and price pressures. It notes subdued consumption, reduced demand for housing, durable goods, and services.

The Bank's economic projection suggests that the cooling of the economy will gradually bring inflation back to its two percent target by sometime in 2025. While the Bank has left the door slightly ajar for further rate hikes, it has stated its commitment to maintaining price stability.

However, investors appear to be betting against further rate hikes. Trading in investments, such as swaps, suggests a minimal chance of a rate hike at the Bank's next policy meeting in December. Market pricing even indicates expectations for a lower rate next spring than the current rate.

Expert Opinions on the Future of Rates

Economists and market experts share various opinions on the Bank's next move. Some believe that the Bank is done with rate hikes but is cautious about announcing it publicly, as it might lead to misconceptions about potential rate cuts. This is because suggesting rate cuts could prompt people to inflate the housing market and increase spending, potentially reigniting inflation.

Carrie Freestone, an economist with RBC, shares a similar view, suggesting that the Bank is unlikely to explicitly state that rates will remain unchanged for an extended period due to growing upside risks to inflation.

Impact on Homeowners

For homeowners facing mortgage renewals, these uncertainties have real consequences. As rates have risen significantly over the past year, many find themselves adapting to higher costs than anticipated. The Spanik family, for example, renewed their mortgage this year, opting for a fixed rate to ensure payment predictability. While they gained peace of mind, it came with an additional cost of $1,200 compared to their previous payments.

Many other families are in a similar position, adjusting to rates that are higher than initially expected. Mortgage professionals have also voiced their concerns, as statements by the central bank regarding prolonged low rates influenced decisions made by both mortgage professionals and Canadians.