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.