Sunday, May 19

Bank of Canada Holds Steady on Policy Rate and Sustains Quantitative Tightening

Bank of Canada Holds Steady on Policy Rate and Sustains Quantitative Tightening


Bank of Canada Maintains Overnight Rate at 5%, Continues Quantitative Tightening

In its latest announcement, the Bank of Canada has opted to keep its target for the overnight rate steady at 5%, with the Bank Rate remaining at 5¼% and the deposit rate at 5%. Additionally, the central bank is adhering to its policy of quantitative tightening.

Across advanced economies, there has been a sustained decline in inflation, although core inflation metrics remain elevated. Major central banks globally continue to prioritize the restoration of price stability. The second quarter of 2023 saw a notable slowdown in global growth, primarily attributed to a significant deceleration in China.

 

Bank of Canada Maintains Overnight Rate at 5%
Bank of Canada Maintains Overnight Rate at 5%

 

Confidence in China’s growth prospects has waned due to ongoing weaknesses in the property sector. In contrast, the United States experienced stronger-than-expected growth, driven by robust consumer spending. In Europe, growth was supported by the service sector’s strength, countering the ongoing contraction in manufacturing. Global bond yields have risen, reflecting higher real interest rates, and international oil prices have surpassed previous assumptions made in the July Monetary Policy Report (MPR).

Canada’s economy has entered a phase of diminished growth, necessary to alleviate inflationary pressures. Economic growth sharply decelerated in the second quarter of 2023, contracting at an annualized rate of 0.2%. This decline was attributed to weakened consumption growth, reduced housing activity, and the impact of wildfires in various regions of the country.

The tightening of monetary policy has moderated household credit growth, affecting a broader spectrum of borrowers. Second-quarter growth in final domestic demand was sustained at 1%, buoyed by government spending and increased business investment. The gradual easing of labor market tightness has persisted, with wage growth maintaining levels of around 4% to 5%.

Recent Consumer Price Index (CPI) data indicates that inflationary pressures remain widespread. After a temporary dip to 2.8% in June, CPI inflation rebounded to 3.3% in July, averaging close to 3%, aligning with the Bank’s projections. The recent surge in gasoline prices is expected to contribute to higher CPI inflation in the short term before subsiding. Both year-over-year and three-month core inflation measures are hovering around 3.5%, indicating limited recent downward momentum in underlying inflation. The longer high inflation persists, the greater the risk that elevated inflation becomes entrenched, complicating the task of restoring price stability.

Given recent indications of easing excess demand in the economy and considering the delayed effects of previous monetary policy measures, the Governing Council has chosen to maintain the policy interest rate at 5% while continuing to normalize the Bank’s balance sheet. However, the Governing Council remains vigilant about the endurance of underlying inflationary pressures and is prepared to implement further interest rate increases if necessary.

The Council will closely monitor core inflation dynamics and the outlook for CPI inflation, particularly assessing factors such as the evolution of excess demand, inflation expectations, wage growth, and corporate pricing behavior, in line with the objective of achieving the 2% inflation target. The Bank maintains its unwavering commitment to restoring price stability for the benefit of Canadians.

Information note: The next scheduled date for announcing the overnight rate target is October 25, 2023. The Bank will release its comprehensive economic and inflation outlook, including associated risks, in the Monetary Policy Report on the same date.


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