Bank of Canada Holds Rates at 5.00%, Cuts 2023 Growth Forecast To 1.2% from 1.8%

Bank of Canada held its overnight rate to 5.00% in October 2023 as expected by markets, following up the no change from the previous meeting. BOC sees “clearer signs that monetary policy is moderating spending and relieving price pressures” “There is growing evidence that past interest rate increases are dampening economic activity and relieving price pressures”. The bank repeated that it” is prepared to increase the policy interest rate further if needed”. The BOC cut 2023 growth forecast to 1.2% (prev 1.8%)

The USDCAD was trading at 1.3772 ahead of the BoC decision and rose to 1.3793 afterwards. The overt hawkish bias remains however all the commentary points to a slowing economy.

Bank of Canada Building

BoC Highlights

  • The overnight rate was raised to 5.00% Prior overnight rate was 5.00%
Canada Interest Rate
 Bank of Canada overnight rate

There is a press conference after this announcement with BOC Governor Tiff Macklem.

  • Rates kept unchanged at 5.00%
  • BOC sees “clearer signs that monetary policy is moderating spending and relieving price pressures”
  • “There is growing evidence that past interest rate increases are dampening economic activity and relieving price pressures”
  • BOC repeated that it ” is prepared to increase the policy interest rate further if needed”
  • Sees inflation returning to 2% at the end of 2025 vs “mid-2025” previously
  • The global economy is slowing and growth is forecast to moderate further as past increases in policy rates and the recent surge in global bond yields weigh on demand
  • Weaker demand and higher borrowing costs are weighing on business investment
  • The surge in Canada’s population is easing labour market pressures in some sectors while adding to housing demand and consumption
  • The labour market remains on the tight side and wage pressures persist
  • a range of indicators suggest that supply and demand in the economy are now approaching balance
  • The BOC projects global GDP growth of 2.9% this year, 2.3% in 2024 and 2.6% in 2025, little changed from previously
  • Growth in the euro area has slowed further

Bank of Canada economic forecasts from Monetary Policy Report

Inflation

  • Sees inflation returning to 2% at the end of 2025 vs “mid-2025” previously
  • 2023 inflation to 3.9% vs 3.7%
  • 2024 inflation to 3.0% vs 2.5% prior
  • 2025 inflation to 2.2% vs 2.1% prior

GDP

  • The global economy is slowing, and growth is forecast to moderate further as past increases in policy rates and the recent surge in global bond yields weigh on demand
  • The BOC projects global GDP growth of 2.9% this year, 2.3% in 2024 and 2.6% in 2025, little changed from previously
  • Cuts 2023 growth forecast To 1.2% (prev 1.8%)
  • 2024 to 0.9% vs 1.2% prior
  • 2025 to 2.5% vs 2.4% prior
  • BOC expects the Canadian economy to grow by 1.2% this year, 0.9% in 2024 and 2.5% in 2025

Press Conference: Release of the Monetary Policy Report / Publication du Rapport sur la politique monétaire

Sticky Inflation

Strong H1 growth amplified the next leg toward the 2% inflation target being harder to achieve than the first moves.

Core inflation as the operational guide to achieving 2% headline inflation is on a month-over-month annualized and seasonally adjusted basis. All of the main measures are running at 4%+ as they jumped higher in April which is not something the BoC could afford to ignore.
The only period of marked improvement was over 2022H1 and since then these measures have been moving sideways at remarkably sticky rates notwithstanding the fact it has already been ~20 months since bond market tightening began in earnest and in anticipation of policy rate hikes.

Bank of Canada Full Rate Statement for October 2023

October 26, 2023

The Bank of Canada today held its target for the overnight rate at 5%, with the Bank Rate at 5¼% and the deposit rate at 5%. The Bank is continuing its policy of quantitative tightening.

The global economy is slowing and growth is forecast to moderate further as past increases in policy rates and the recent surge in global bond yields weigh on demand. The Bank projects global GDP growth of 2.9% this year, 2.3% in 2024 and 2.6% in 2025. While this global growth outlook is little changed from the July Monetary Policy Report (MPR), the composition has shifted, with the US economy proving stronger and economic activity in China weaker than expected. Growth in the euro area has slowed further. Inflation has been easing in most economies, as supply bottlenecks resolve and weaker demand relieves price pressures. However, with underlying inflation persisting, central banks continue to be vigilant. Oil prices are higher than was assumed in July, and the war in Israel and Gaza is a new source of geopolitical uncertainty.

In Canada, there is growing evidence that past interest rate increases are dampening economic activity and relieving price pressures. Consumption has been subdued, with softer demand for housing, durable goods and many services. Weaker demand and higher borrowing costs are weighing on business investment. The surge in Canada’s population is easing labour market pressures in some sectors while adding to housing demand and consumption. In the labour market, recent job gains have been below labour force growth and job vacancies have continued to ease. However, the labour market remains on the tight side and wage pressures persist. Overall, a range of indicators suggest that supply and demand in the economy are now approaching balance.

After averaging 1% over the past year, economic growth is expected to continue to be weak for the next year before increasing in late 2024 and through 2025. The near-term weakness in growth reflects both the broadening impact of past increases in interest rates and slower foreign demand. The subsequent pickup is driven by household spending as well as stronger exports and business investment in response to improving foreign demand. Spending by governments contributes materially to growth over the forecast horizon. Overall, the Bank expects the Canadian economy to grow by 1.2% this year, 0.9% in 2024 and 2.5% in 2025.

CPI inflation has been volatile in recent months—2.8% in June, 4.0% in August, and 3.8% in September. Higher interest rates are moderating inflation in many goods that people buy on credit, and this is spreading to services. Food inflation is easing from very high rates. However, in addition to elevated mortgage interest costs, inflation in rent and other housing costs remains high. Near-term inflation expectations and corporate pricing behaviour are normalizing only gradually, and wages are still growing around 4% to 5%. The Bank’s preferred measures of core inflation show little downward momentum.

In the Bank’s October projection, CPI inflation is expected to average about 3½% through the middle of next year before gradually easing to 2% in 2025. Inflation returns to target about the same time as in the July projection, but the near-term path is higher because of energy prices and ongoing persistence in core inflation.

With clearer signs that monetary policy is moderating spending and relieving price pressures, Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet. However, Governing Council is concerned that progress towards price stability is slow and inflationary risks have increased, and is prepared to raise the policy rate further if needed. Governing Council wants to see downward momentum in core inflation, and continues to be focused on the balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behaviour. The Bank remains resolute in its commitment to restoring price stability for Canadians.

Information note
The next scheduled date for announcing the overnight rate target is December 6, 2023. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR on January 24, 2024.

Source: Bank of Canada Monetary Policy Report

From the TradersCommunity News Desk