Today, the Bank of Canada announced that it would maintain its overnight policy interest rate at 5.00%, stating that there is “growing evidence” that past interest rate increases dampen economic activity and relieve price pressures.

This decision comforts borrowers whose mortgage costs have risen steadily since March of 2022. As for real relief – in the form of rate cuts – the Bank demurred, noting that its preferred measures of core inflation show “little downward momentum.” Consequently, the Bank said it is holding this policy rate and continuing its current policy of quantitative tightening.

We capture the Bank’s observations and latest economic forecasts in the summary below.

Inflation facts and outlook

• In Canada, inflation measured by the Consumer Price Index (“CPI”) has been volatile in recent months: 2.8% in June, 4.0% in August, and 3.8% in September.
• Higher interest rates are moderating inflation in many goods that people buy on credit, and this is spreading to services.
• Food inflation is easing from very high rates; however, in addition to elevated mortgage interest costs, inflation in rent and other housing costs remains high.
• Near-term inflation expectations and corporate pricing behaviour are normalizing only gradually, and wages are still growing around 4% to 5%
• The Bank’s preferred measures of core inflation show little downward momentum.

Canadian housing and economic performance

• There is growing evidence that past interest rate increases are dampening economic activity and relieving price pressures.
• Consumption has been subdued, with softer demand for housing, durable goods and many services.
• Weaker demand and higher borrowing costs are weighing on business investment.
• A surge in Canada’s population is easing labour market pressures in some sectors while adding to housing demand and consumption.
• In the labour market, recent job gains have been below labour force growth, and job vacancies have continued to ease; however, the labour market remains “on the right side,” and wage pressures persist.
• Overall, a range of indicators suggest that supply and demand in the economy are now “approaching balance.”

Global economic performance and outlook

• The global economy is slowing, and growth is forecast to moderate further as past increases in policy interest rates and the recent surge in global bond yields weigh on demand.
• The Bank projects global GDP growth of 2.9% this year, 2.3% in 2024 and 2.6% in 2025. While this outlook is little changed from the Bank’s July Monetary Policy Report, the composition has shifted, with the US economy proving stronger and economic activity in China weaker than expected
• Growth in the Euro area has “slowed further.”
• Inflation has been easing in most economies, as supply bottlenecks resolve and weaker demand relieves price pressures, but underlying inflation is persisting, meaning central banks must “continue to be vigilant.”
• Oil prices are higher than the BoC assumed in July, and the war in Israel and Gaza is a new source of geopolitical uncertainty.

Summary and Outlook

The BoC noted that after averaging 1% over the past year, economic growth is expected to remain “weak” for the next year before increasing in late 2024 and through 2025. Near-term weakness in growth reflects both the broadening impact of past increases in interest rates and slower foreign demand. The subsequent economic “pickup” will be driven by household spending, stronger exports, and business investment in response to improving foreign demand. Spending by governments contributes materially to growth over the forecast horizon. The Bank expects the Canadian economy to grow by 1.2% this year, 0.9% in 2024 and 2.5% in 2025.

In the Bank’s October projection, CPI inflation is expected to average about 3.5% through the middle of next year before gradually easing to 2% in 2025. Inflation is expected to return to the Bank’s target about the same time policymakers forecast in their July 2023 projection, “but the near-term path is higher because of energy prices and ongoing persistence in core inflation.”

As for what to expect going forward, the Bank had this to say about interest rates: “With clearer signs that monetary policy is moderating spending and relieving price pressures, Governing Council decided to hold the policy rate at 5% and continue normalizing the Bank’s balance sheet. However, the Governing Council is concerned that progress towards price stability is slow and inflationary risks have increased, and is prepared to raise the policy rate further if needed.”

The message is, therefore, clear: the Bank wants to see downward momentum in core inflation before it changes tack and continues to be focused on the “balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behaviour.”

Once again, the Bank ended its communique with a familiar phrase: it remains “resolute in its commitment to restoring price stability for Canadians.”

What’s next?

The Bank’s final (scheduled) interest rate announcement of 2023 takes place on December 6th, and we will follow immediately after with our next executive summary.