Bank of Canada Continues to Hold Interest Rate Steady at 4.5%

The Bank of Canada has announced it will hold its target for the overnight rate at 4.5%, with the Bank Rate at 4.75% and the deposit rate at 4.5%, while continuing its policy of quantitative tightening.

According to the central bank, CPI inflation is forecast to decrease to around 3% by mid-2023 and more gradually reach the 2% target by 2024’s end.

According to the Monetary Policy Report, goods price inflation is rapidly easing, reflecting lower energy prices, improved global supply chains, and restrictive monetary policies’ effects on interest rate-sensitive sectors. However, services price inflation is responding more slowly, leading to a gradual return to the 2% target.

Canadian demand continues to outstrip supply, with the labour market remaining tight. Despite a slowing economy and increasing labour supply, the labour market exceeds maximum sustainable employment. The Bank of Canada expects economic growth to remain subdued this year, with a gradual pick-up through 2024. Strong population growth supports consumption and employment growth, but higher interest rates restrain household spending, business investment, and export growth.

Bank of Canada says inflation is easing in many countries due to lower energy prices, stabilizing global supply chains, and tighter monetary policy, while labour markets stay tight, and core inflation in advanced economies indicates persistent price pressures, particularly in services. Global economic growth has exceeded expectations, with the US and Europe experiencing robust growth, although it’s expected to weaken as tighter monetary policies take effect. The US is predicted to face slower growth due to recent banking sector stress and its impact on Canadian exports. China’s economy, however, is rebounding, especially in services, and commodity prices remain near January levels.

The Bank of Canada anticipates near-term inflation expectations to decline, services price inflation and wage growth to moderate, and businesses’ pricing behaviour to normalize. Consequently, domestic price pressures will ease further, returning inflation gradually to the 2% target.

Canada’s GDP growth is projected at 1.4% in 2023 and 1.3% in 2024, with an expected rebound to 2.5% in 2025 as the economy adjusts to higher interest rates and achieves the 2% inflation target.

The next interest rate decision is on Wednesday, June 7.