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Bank of Canada Holds Policy Rate Amid Strong Demand and Tight Labor Market: Expert Analysis and Insights

The Bank of Canada has just announced that it will maintain its target for the overnight rate at 4.5%, with the Bank Rate at 4.75% and the deposit rate at 4.5%. The Bank will also continue with its quantitative tightening policy. This decision was made in light of the current economic conditions in Canada and globally.

Many countries are experiencing easing inflation due to lower energy prices, normalized global supply chains, and tighter monetary policy. However, labour markets remain tight, and core inflation in many advanced economies is indicating persistent price pressures, especially for services.

Global economic growth has been stronger than expected, with the US and Europe experiencing growth surprises. However, this is expected to weaken as tighter monetary policies continue to feed through those economies. Recent stress in the banking sector in the US has tightened credit conditions further, and US growth is expected to slow considerably in the coming months. This will particularly affect sectors that are important for Canadian exports. Meanwhile, China’s economy has rebounded, especially in services, and commodity prices are close to their January levels.

The Canadian economy continues to face strong demand despite supply constraints and a tight labor market. According to the Bank of Canada’s latest outlook, the first quarter of 2023 has shown stronger-than-expected economic growth, with exports and consumption seeing a positive rebound. Although the Bank’s Business Outlook Survey indicates a slight improvement in labor shortages, wage growth remains higher than productivity growth. Meanwhile, the housing market remains subdued.

Consumption is expected to moderate this year as more households renew their mortgages at higher rates, and restrictive monetary policies work their way through the economy. Softening foreign demand is also expected to restrain exports and business investment. GDP growth is projected to be weak through the remainder of this year before strengthening gradually next year. This implies that the economy will move into excess supply in the second half of this year. The Bank projects Canada’s economy to grow by 1.4% this year and 1.3% in 2024 before picking up to 2.5% in 2025.

CPI inflation eased to 5.2% in February, and the Bank’s preferred measures of core inflation were just under 5%. The Bank expects CPI inflation to fall quickly to around 3% in the middle of this year and then decline more gradually to the 2% target by the end of 2024. Getting inflation back to 2% could prove to be more challenging because inflation expectations are coming down slowly, service price inflation and wage growth remain elevated, and corporate pricing behaviour has yet to normalize. As it sets monetary policy, Governing Council will be particularly focused on these indicators and the evolution of core inflation to gauge the progress of CPI inflation back to target.

In light of its outlook for growth and inflation, Governing Council has decided to maintain the policy rate at 4.5%. Quantitative tightening will continue to complement this restrictive stance. Governing Council will continue to assess whether monetary policy is sufficiently restrictive to relieve price pressures and remains prepared to raise the policy rate further if needed to return inflation to the 2% target.

The Bank of Canada remains resolute in its commitment to restoring price stability for Canadians. The next scheduled date for announcing the overnight rate target is June 7, 2023. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the Monetary Policy Report on July 12, 2023.

​What do you think about the Bank of Canada’s decision to maintain the policy rate at 4½%? Do you agree with their assessment of the current state of the Canadian economy? We’d love to hear your thoughts in the comments below!

Matt Vardy
Matt Vardy