Bank of Canada Holds Interest Rate Steady at 5%
Source: David Kawai/BLOOMBERG NEWS
The Bank of Canada has once again chosen to maintain its key interest rate at 5%, a move widely expected as the country faces ongoing economic challenges. With a total of 10 rate hikes implemented since early 2022 to address inflation, the central bank is now signalling a potential pause in its tightening cycle, acknowledging signals of a cooling Canadian economy.
Economic Landscape
This decision to keep the interest rate steady is set against the backdrop of a global economic slowdown and diminishing inflationary pressures. Within Canada, economic growth hit a roadblock in the middle quarters of 2023, experiencing a 1.1% decrease in real GDP during Q3. The impact of higher interest rates on spending is evident, with near-zero consumption growth and essentially stagnant business investment over the past year.
Labour Market and Inflation
Source: The Bank of Canada
Canada's labor market is currently facing a slowdown, characterized by sluggish job creation, diminishing job vacancies, and a modest uptick in the unemployment rate. Despite these challenges, wages are proving resilient, showcasing a 4-5% increase. The economic slowdown has led to a decrease in inflationary pressures across various goods and services, resulting in a drop in the Consumer Price Index (CPI) inflation to 3.1% in October. While shelter prices have seen a slight increase, the Bank of Canada's preferred measures of core inflation have hovered around 3Β½-4%.
Bank's Rationale
In maintaining the key interest rate at 5%, the Bank of Canada is revealing a carefully considered strategy in response to the intricate economic landscape. This decision underscores a deliberate effort to balance economic growth amid indications of cooling and inflationary pressures. The central bank remains dedicated to addressing risks and preserving flexibility in its monetary policy. The future trajectory of interest rates will be significantly shaped by the evolving economic conditions, both domestically and globally. Stay tuned for the latest updates!
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REFERENCES
Higher Yields βNot a Substituteβ for Monetary Policy Action, Bank of Canada Governor Says. (2023, October 13). Wall Street Journal. https://www.wsj.com/articles/higher-yields-not-a-substitute-for-monetary-policy-action-bank-of-canada-governor-says-1a690ed7
Evans, P. (2023, November 21). Canadaβs inflation rate cools to 3.1% but the cost of living keeps going up. CBC. https://www.cbc.ca/news/business/canada-inflation-october-1.7034686
Bank of Canada. (2023, December 6). Bank of Canada maintains policy rate, continues quantitative tightening. https://www.bankofcanada.ca/2023/12/fad-press-release-2023-12-06/
