Bank of Canada Maintains Benchmark Interest Rate at 5.00%
In a highly anticipated decision Wednesday, the Bank of Canada has chosen to maintain its benchmark (overnight) interest rate at 5.00%, signaling a temporary pause in a series of rate hikes that began in March 2022. During its previous meeting in July, the Bank raised the rate by 0.25%, citing evidence of sustained excess demand and elevated core inflation. Today, the Bank's announcement carries a similar tone but with a different outcome.
Canadian Economic Performance
Canada's economy has entered a phase of slower growth, which the Bank deems necessary to alleviate price pressures. Economic growth experienced a significant slowdown in the second quarter of 2023, contracting by 0.2% on an annualized basis. This downturn is attributed to a notable weakening in consumption growth, a decline in housing activity, and the impact of wildfires in various regions. Household credit growth has moderated due to higher interest rates, affecting a broader range of borrowers. Final domestic demand saw a modest increase of 1% in the second quarter, boosted by government spending and increased business investment. While the labor market has gradually eased, wage growth remains stable at around 4% to 5%.
Inflation Overview
Recent Consumer Price Index (CPI) data indicate persistent broad-based inflationary pressures. CPI inflation, after briefly easing to 2.8% in June, rebounded to 3.3% in July, closely aligning with the Bank's projections. The recent surge in gasoline prices is expected to contribute to higher CPI inflation in the near term. Both year-over-year and three-month measures of core inflation stand at approximately 3.5%, indicating limited recent downward momentum in underlying inflation. The Bank emphasizes that prolonged high inflation increases the risk of entrenched inflation, posing challenges to restoring price stability.
Global Economic Indicators
Global growth decelerated in the second quarter of 2023, primarily due to a significant slowdown in China. China's growth prospects have diminished amid ongoing weakness in the property sector, impacting confidence. In contrast, the United States experienced stronger-than-expected growth, driven by robust consumer spending. Europe saw growth supported by the service sector, offsetting continued contraction in manufacturing. Global bond yields have risen, reflecting higher real interest rates, and international oil prices are higher than anticipated in the Bank's July Monetary Policy Report (MPR).
Summary and Future Outlook
In summary, the Bank states that "with recent evidence of easing excess demand in the economy" and considering the lagged effects of monetary policy, the Governing Council has opted to maintain the policy interest rate at 5% and continue efforts to normalize the Bank's balance sheet. However, the Bank remains vigilant about "underlying inflationary pressures" and stands ready to "raise the policy interest rate further if necessary."
The Governing Council will closely monitor core inflation dynamics, CPI inflation prospects, excess demand evolution, inflation expectations, wage growth, and corporate pricing behavior to ensure alignment with the Bank's 2% inflation target. As always, the Bank reaffirms its unwavering commitment to "restoring price stability for Canadians."
Stay Informed
Mark your calendars for the Bank's next scheduled policy announcement on October 25th, the penultimate announcement of 2023. In the interim, pinnaclemortgagesolutions.ca remains fully prepared to offer financing options tailored to your needs. Don't hesitate to reach out to us if we can be of assistance in any way.
