The Bank of Canada today held its key interest rate at 5% much to the relief of thousands of Canadians struggling with mortgage payments.
The national bank in its statement confirmed that in Canada, economic growth stalled through the middle quarters of 2023.
“Real GDP contracted at a rate of 1.1% in the third quarter, following growth of 1.4% in the second quarter,” BoC’s statement read. “Higher interest rates are clearly restraining spending: consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year.”
BoC says that the slowdown in the economy is reducing inflationary pressures in a broadening range of goods and services prices. Combined with the drop in gasoline prices, this contributed to the easing of CPI inflation to 3.1% in October. However, shelter price inflation has picked up, reflecting faster growth in rent and other housing costs along with the continued contribution from elevated mortgage interest costs.
The global economy is also continuing to slow and inflation has eased further, BoC pointed out. In the United States, growth has been stronger than expected, led by robust consumer spending, but is likely to weaken in the months ahead as past policy rate increases work their way through the economy. Growth in the euro area has weakened and, combined with lower energy prices, this has reduced inflationary pressures. Oil prices are about $10-per-barrel lower than was assumed in the October Monetary Policy Report (MPR). Financial conditions have also eased, with long-term interest rates unwinding some of the sharp increases seen earlier in the autumn. The US dollar has weakened against most currencies, including Canada’s.
In recent months, Bank of Canada’s preferred measures of core inflation have been around 3.5 to 4%, with the October data coming in towards the lower end of this range.
With further 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. Governing Council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed.
