The Bank of Canada held its key overnight interest rate at five per cent as widely expected by economists and markets in light of recent signs the domestic economy is slowing and unemployment is ticking up.
“With further signs that monetary policy is moderating spending and relieving price pressures, Governing Council decided to hold the policy rate,” the central bank said in a Dec. 6 statement.
However, the Bank of Canada cautioned that inflation concerns remain and it is prepared to raise rates further “if needed.”
Further hikes won’t happen if there is sustained easing in core inflation, with the central bank keeping an eye on other trends including wage growth and corporate pricing behaviour.
“The Bank remains resolute in its commitment to restoring price stability for Canadians,” the statement read.
Jules Boudreau, senior economist at Mackenzie Investments, noted that the Bank of Canada did not drop its cautionary statement about the possibility of hiking rates further even though in his view that’s extremely unlikely to happen.
“It’s clear that the Governing Council won’t risk removing that statement before it is ready to begin cutting,” the economist said, adding that “tame rhetoric” in early 2023 was misinterpreted, a scenario central bankers will not want to risk repeating.
“At the start of 2023, markets, consumers, and businesses saw the bank’s tame rhetoric around rates as an indication that it was done hiking,” Boudreau said, adding that this provoked a rebound in growth, inflation and the housing market. In June and July, after two consecutive pauses, the Bank of Canada raised the key overnight rate by a total of 50 basis points to five per cent.
James Orlando, a senior economist at Toronto-Dominion Bank, said an interest rate cut is likely, but not until April.
“With inflation still above three per cent, we get why the BoC (Bank of Canada) isn’t ready to declare victory,” he wrote in a Dec. 6 note.
“Instead, the BoC seems like it is preparing to sit on the sidelines for the next couple of months while maintaining its cautious rhetoric.”
Andrew DiCapua, senior economist at the Canadian Chamber of Commerce, said businesses would take some comfort from the latest rate decisions, but he cautioned against optimism about rate cuts, particularly if they are expected before the second quarter.
“Many factors can complicate the timing of cuts, including the persistence of core inflation, the strength of the housing market, and whether first-quarter GDP continues negative growth,” DiCapua said.
“What’s even more concerning is that households are being squeezed by significant increases in mortgage interest payments, with nearly $190 billion in renewals expected next year,” said DiCapua.
“Payments could increase anywhere from 20 to 50 per cent, depending on the type of mortgage, putting Canadian families under unprecedented pressure, and further restraining spending in the economy.”
Canada’s economic growth stalled through the middle quarters of 2023, with real GDP contracting at a rate of 1.1 per cent in the third quarter following growth of 1.4 per cent in the second quarter.
“Higher interest rates are clearly restraining spending,” the Bank of Canada said, noting that consumption growth in the last two quarters was close to zero and business investment has been volatile but essentially flat over the past year.
While government spending and new home construction provided a boost, the labour market continued to ease, with job creation slower than labour force growth and the unemployment rate rising modestly.
“Overall, these data and indicators for the fourth quarter suggest the economy is no longer in excess demand,” the central bank said.
The slowdown in the economy is reducing inflationary pressures in a growing range of goods and services, which, combined with the drop in gas prices, contributed to the easing of CPI inflation to 3.1 per cent in October.
The central bank noted that shelter price inflation is an outlier, and actually picked up as a result of faster growth in rent and other housing costs alongside continued elevated mortgage interest costs.
Core inflation, the central bank’s preferred measure, has been around 3.5 to four per cent in recent months, with the October data coming in towards the lower end of this range.
Growth in the euro area has already weakened and, combined with lower energy prices, this has reduced inflationary pressures.
The Bank of Canada will make its next key interest rate announcement on Jan. 24, 2024, along with its full outlook for the economy and inflation.
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
Companies in this story: (TSX:GSPTSE, TSX:CADUSD)
The Canadian Press. All rights reserved.
OTTAWA – Canada’s inflation rate fell to two per cent last month, finally hitting the Bank of Canada’s target after a tumultuous battle with skyrocketing price growth.
The annual inflation rate fell from 2.5 per cent in July to reach the lowest level since February 2021.
Statistics Canada’s consumer price index report on Tuesday attributed the slowdown in part to lower gasoline prices.
Clothing and footwear prices also decreased on a month-over-month basis, marking the first decline in the month of August since 1971 as retailers offered larger discounts to entice shoppers amid slowing demand.
The Bank of Canada’s preferred core measures of inflation, which strip out volatility in prices, also edged down in August.
The marked slowdown in price growth last month was steeper than the 2.1 per cent annual increase forecasters were expecting ahead of Tuesday’s release and will likely spark speculation of a larger interest rate cut next month from the Bank of Canada.
“Inflation remains unthreatening and the Bank of Canada should now focus on trying to stimulate the economy and halting the upward climb in the unemployment rate,” wrote CIBC senior economist Andrew Grantham.
Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO, said Tuesday’s figures “tilt the scales” slightly in favour of more aggressive cuts, though he noted the Bank of Canada will have one more inflation reading before its October rate announcement.
“If we get another big downside surprise, calls for a 50 basis-point cut will only grow louder,” wrote Reitzes in a client note.
The central bank began rapidly hiking interest rates in March 2022 in response to runaway inflation, which peaked at a whopping 8.1 per cent that summer.
The central bank increased its key lending rate to five per cent and held it at that level until June 2024, when it delivered its first rate cut in four years.
A combination of recovered global supply chains and high interest rates have helped cool price growth in Canada and around the world.
Bank of Canada governor Tiff Macklem recently signalled that the central bank is ready to increase the size of its interest rate cuts, if inflation or the economy slow by more than expected.
Its key lending rate currently stands at 4.25 per cent.
CIBC is forecasting the central bank will cut its key rate by two percentage points between now and the middle of next year.
The U.S. Federal Reserve is also expected on Wednesday to deliver its first interest rate cut in four years.
This report by The Canadian Press was first published Sept. 17, 2024.
The Canadian Press. All rights reserved.
FREDERICTON – New Brunswick‘s finance minister says the province recorded a surplus of $500.8 million for the fiscal year that ended in March.
Ernie Steeves says the amount — more than 10 times higher than the province’s original $40.3-million budget projection for the 2023-24 fiscal year — was largely the result of a strong economy and population growth.
The report of a big surplus comes as the province prepares for an election campaign, which will officially start on Thursday and end with a vote on Oct. 21.
Steeves says growth of the surplus was fed by revenue from the Harmonized Sales Tax and federal money, especially for health-care funding.
Progressive Conservative Premier Blaine Higgs has promised to reduce the HST by two percentage points to 13 per cent if the party is elected to govern next month.
Meanwhile, the province’s net debt, according to the audited consolidated financial statements, has dropped from $12.3 billion in 2022-23 to $11.8 billion in the most recent fiscal year.
Liberal critic René Legacy says having a stronger balance sheet does not eliminate issues in health care, housing and education.
This report by The Canadian Press was first published Sept. 16, 2024.
The Canadian Press. All rights reserved.
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