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Bank of Canada Interest Rate Update, Continues Quantitative Tightening

In a decisive move reflecting the current economic landscape, the Bank of Canada has announced its decision to maintain the target for the overnight rate at 5%, with the Bank Rate at 5¼% and the deposit rate at 5%. This decision underscores the Bank’s ongoing commitment to quantitative tightening, a strategy to stabilize the economy amidst global slowdowns and fluctuating inflation rates.

Global Economic Context

The global economy is experiencing a slowdown, with inflation showing signs of easing. The United States, despite robust consumer spending leading to stronger-than-expected growth, is anticipated to face a weakening economy due to the impact of previous policy rate increases. The euro area is witnessing reduced growth and inflationary pressures, partly due to lower energy prices. Notably, oil prices have dropped by about $10 per barrel compared to the October Monetary Policy Report (MPR) assumptions. Financial conditions have somewhat relaxed, with long-term interest rates reversing some earlier significant increases. The US dollar has also weakened against most currencies, including the Canadian dollar.

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Canada’s Economic Landscape

Canada’s economic growth hit a plateau in the middle quarters of 2023. Real GDP saw a contraction of 1.1% in the third quarter, following a 1.4% growth in the second quarter. The impact of higher interest rates is evident, with consumption growth nearly stagnant in the last two quarters and business investment showing little change over the past year. While exports and inventory adjustments negatively impacted GDP growth in the third quarter, government spending and new home construction provided a boost. The labour market is showing signs of easing, with slower job creation, declining job vacancies, and a modest rise in unemployment rates. However, wages continue to rise by 4-5%.

Inflation and Monetary Policy

The economic slowdown reduces inflationary pressures across various goods and services. This, combined with a drop in gasoline prices, decreased CPI inflation to 3.1% in October. Shelter price inflation, however, is on the rise due to increased rent and other housing costs, along with sustained high mortgage interest costs. The Bank’s preferred measures of core inflation have been hovering around 3½-4%, with recent data leaning towards the lower end of this range.

With signs that monetary policy is effectively moderating spending and alleviating price pressures, the Governing Council decided to maintain the policy rate at 5% and continue normalizing the Bank’s balance sheet. The Council remains vigilant about inflation risks and is prepared to raise the policy rate further if necessary. The focus remains on balancing demand and supply in the economy, monitoring inflation expectations, wage growth, and corporate pricing behaviour. The Bank is firmly committed to restoring price stability for Canadians.

Looking Ahead

The following announcement for the overnight rate target is January 24, 2024. The Bank will also publish its next complete outlook for the economy and inflation, including potential risks, in the MPR at that time.

Malik Asad
Malik Asad
At, Malik doesn't just report news; he breathes life into stories. His articles are more than just collections of facts; they are narratives that capture the essence of events, people, and places. Whether covering the latest entertainment buzz, technological advancements, or pressing social issues, Malik's writing style remains captivating and insightful.


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