Today, the Bank of Canada announced it is keeping its benchmark interest rate at 5.0%, unchanged from July of 2023. However, much has changed in the economy and in the world since then. For evidence, we parsed today’s announcement and present a summary of the Bank’s key observations below.
Canadian Inflation
- CPI inflation slowed to 2.8% in February, with easing in price pressures becoming more broad-based across goods and services. However, shelter price inflation is still very elevated, driven by growth in rent and mortgage interest costs
- Core measures of inflation, which had been running around 3.5%, slowed to just over 3% in February, and 3-month annualized rates are suggesting downward momentum
- The Bank expects CPI inflation to be close to 3% during the first half of 2024, move below 2.5% in the second half, and reach the 2% inflation target in 2025
Canadian Economic Performance and Housing
- Economic growth stalled in the second half of last year and the economy moved into excess supply
- A broad range of indicators suggest that labour market conditions continue to ease. Employment has been growing more slowly than the working-age population and the unemployment rate has risen gradually, reaching 6.1% in March. There are some recent signs that wage pressures are moderating
- Economic growth is forecast to pick up in 2024. This largely reflects both strong population growth and a recovery in spending by households
- Residential investment is strengthening, responding to continued robust demand for housing.
- The contribution to growth from spending by governments has also increased. Business investment is projected to recover gradually after considerable weakness in the second half of last year. The Bank expects exports to continue to grow solidly through 2024.
- Overall, the Bank forecasts GDP growth of 1.5% in 2024, 2.2% in 2025, and 1.9% in 2026. The strengthening economy will gradually absorb excess supply through 2025 and into 2026
Global Economic Performance and Bond Yields
- The Bank expects the global economy to continue growing at a rate of about 3%, with inflation in most advanced economies easing gradually
- The US economy has “again proven stronger than anticipated, buoyed by resilient consumption and robust business and government spending.” US GDP growth is expected to slow in the second half of this year, but remain stronger than forecast in January
- The euro area is projected to gradually recover from current weak growth. Global oil prices have moved up, averaging about $5 higher than the Bank assumed in its January Monetary Policy Report
- Since January, bond yields have increased but, with narrower corporate credit spreads and sharply higher equity markets, overall financial conditions have eased
- The Bank has revised up its forecast for global GDP growth to 2.75% in 2024 and about 3% in 2025 and 2026
- Inflation continues to slow across most advanced economies, although progress will likely be bumpy. Inflation rates are projected to reach central bank targets in 2025
Outlook
Based on the outlook, Governing Council said it decided to hold the Bank’s policy rate at 5% and to continue to “normalize” the Bank’s balance sheet. It also noted that while inflation is still too high and risks remain, CPI and core inflation have eased further in recent months.
The Council said it will be looking for evidence that this downward momentum is sustained. Governing Council is particularly watching the “evolution of core inflation,” and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.
As it has said consistently over the past year, the Bank will remain “resolute in its commitment to restoring price stability for Canadians.”
Next touchpoint
On June 5th, 2024, the Bank returns with another monetary policy announcement and economists are already lining up with predictions of a rate cut either then or in July. First National will provide an executive summary after both decisions. In between, please visit the Resources page of this website for other insights.