October 26, 2023
The Bank of Canada held its benchmark interest rate steady on Wednesday but left the door open to further increases, as its latest forecast showed a thorny combination of weaker economic growth and more-persistent inflation.
Bank Governor Tiff Macklem and his team kept the policy rate at 5 per cent, the highest level in more than two decades. The decision was widely expected by analysts. It marked the second straight rate announcement in which the bank has remained on the sidelines.
After 10 rate hikes since March, 2022, including two over the summer, higher borrowing costs are having their intended effect. Canadian consumers are pulling back on spending, unemployment is up and economic growth has slowed to a crawl. This means supply and demand in the Canadian economy are “now approaching balance,” the central bank said in its rate announcement – a prerequisite for stabilizing prices.
But the downbeat growth outlook doesn’t mean inflationary pressures have disappeared. The bank increased its near-term forecast for inflation, noting a rise in housing costs and energy prices, as well as a risk that the conflict in Israel and Gaza will escalate and push global oil prices even higher.
“We held our policy rate steady today because monetary policy is working to cool the economy and relieve price pressures, and we want to give it time to do its job,” Mr. Macklem said in a news conference after the announcement.
“But further easing in inflation is likely to be slow, and inflationary risks have increased,” he said, adding that the central bank is prepared to raise interest rates again if inflation and other economic indicators aren’t moving in the right direction.
The blend of slower growth and stubborn inflation suggests the Canadian economy is heading for a rough patch. Mr. Macklem said the bank is still not forecasting a recession. But he said the “path to a soft landing,” where inflation returns to the central bank’s 2-per-cent target without a substantial economic contraction or rise in joblessness, “has gotten narrower.”
The bank now expects the annual rate of inflation to average around 3.5 per cent for the next year – higher than its last estimate, which it made in July – before falling back to the 2-per-cent target around the middle of 2025. Consumer Price Index inflation was 3.8 per cent in September, down from a peak of 8.1 per cent in summer 2022.
Meanwhile, the bank cut its economic growth forecast for this year and next year. It now expects gross domestic product to grow 1.2 per cent in 2023, down from the previous estimate of 1.8 per cent. It trimmed its 2024 GDP growth estimate to 0.9 per cent from 1.2 per cent.
This reflects a more abrupt slowdown in the Canadian economy in recent months, weaker foreign demand for exports, and the spike in global bond yields since the summer, which has tightened financial conditions.
