Bank of Canada Maintains Policy Rate and Continues Quantitative Tightening
In its recent announcement, the Bank of Canada has opted to maintain its target for the overnight rate at 5%, keeping the Bank Rate at 5¼% and the deposit rate at 5%. The central bank is steadfast in its commitment to the policy of quantitative tightening.
The global economic landscape experienced a slowdown in growth during the fourth quarter. While the US GDP growth decelerated, it remained surprisingly robust and diverse, supported by solid contributions from both consumption and exports. In the Euro area, economic growth stagnated towards the end of the year after contracting in the third quarter. Inflation in both the United States and the Euro area continued its easing trend. Notably, bond yields increased since January, and corporate credit spreads narrowed. Equity markets also witnessed a sharp rise, and global oil prices slightly exceeded the assumptions made in the January Monetary Policy Report (MPR).
Turning the focus to Canada, the economy exhibited growth in the fourth quarter that surpassed expectations, albeit at a restrained pace below its potential. Real GDP expanded by 1%, recovering from a contraction of 0.5% in the third quarter. Consumption saw a modest 1% increase, while final domestic demand contracted due to a significant decline in business investment. The growth was buoyed by a strong increase in exports. Employment growth continued to lag behind population growth, and there are early indications of easing wage pressures. Overall, the data suggests an economy operating with modest excess supply.
Consumer Price Index (CPI) inflation in Canada eased to 2.9% in January, driven by a moderation in goods price inflation. Notably, shelter price inflation remained elevated and emerged as the primary contributor to overall inflation. Underlying inflationary pressures persist, as year-over-year and three-month measures of core inflation are in the 3% to 3.5% range. While the share of CPI components growing above 3% declined, it remains above historical averages. The Bank anticipates inflation to hover around 3% during the first half of the year before gradually easing.
The Governing Council has decided to keep the policy rate at 5% and to continue the normalization of the Bank's balance sheet. The Council remains vigilant about risks to the inflation outlook, particularly concerning the persistence of underlying inflation. Emphasizing the importance of further and sustained easing in core inflation, the Governing Council continues to closely monitor the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behavior. The Bank maintains its unwavering commitment to restoring price stability for Canadians.
As an information note, the next scheduled date for announcing the overnight rate target is April 10, 2024. The Bank will release its next comprehensive outlook for the economy and inflation, including risks to the projection, in the Monetary Policy Report (MPR) on the same date.
