OTTAWA –
The Bank of Canada held its overnight rate at 5 per cent on Wednesday, as Canada’s economy continues to slow and indications that supply and demand are now approaching balance.
Interest rate increases have dampened economic growth, with Canadian economic growth averaging 1 per cent this year. The economy is expected to remain weak throughout 2024, before picking up to 2.5 per cent in 2025.
The economy is expected to remain weak throughout 2024, before picking up to 2.5 per cent in 2025.
“With clearer signs that monetary policy is moderating spending and relieving price pressures,” reads the release from the bank. “Governing Council decided to hold the policy rate at 5 per cent and to continue to normalize the bank’s balance sheet.”
However, the bank said it remains concerned that progress towards its target rate of 2 per cent remains slow. Oil prices are higher than expected, and there is a risk they may go higher if the Israel-Gaza war turns into a regional conflict. On the domestic side, inflation expectations among households and businesses remain high, which also pose a risk to the central bank’s ability to get back to target, it said.
“Furthermore, businesses may be slower to adjust their pricing behaviour,” reads the release. “In addition, if the labour market remains tight or productivity growth remains weak, cost pressures could be higher and more persistent than projected.”
In September, inflation was at 3.8 per cent, down from 4 per cent in August. The bank expects the consumer price index to remain at 3.5 per cent until the middle of next year, before easing back to its 2-per cent target in 2025.
In particular, high shelter costs are causing inflationary pressures in the Canadian economy. Canadian households are paying more in rental and mortgage costs. While delinquency rates on mortgages remain at an all-time low, the share of borrowers falling behind on payments by 60 days in other credit products has increased.
“In particular, delinquency rates for motor vehicle loans have surpassed pre-pandemic levels,” reads the release.
The bank remains concerned the economy could slow down faster than it expects, with businesses and households cutting back on investment and consumer spending more than what it expects.
The also bank points to monetary policy tightening potentially triggering market volatility that could lead to sharp slowdowns in global growth.
“Monetary policy is tight in most advanced economies, and bond yields have risen sharply in recent weeks, reaching levels not seen since before the 2008-09 global financial crisis,” reads the release. “If the increase in yields proves to larger or more persistent than expected, equity and other asset prices could be negatively impacted further.”
The next policy rate announcement is expected on Jan. 24.
This is a breaking news update. Check back for more information.
