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Against the backdrop of a decelerating economy and growing calls for less restrictive monetary policy, the Bank of Canada made its final scheduled interest rate decision of the year today.

That decision – to keep its overnight policy interest rate at 5.00% – was broadly expected. What was not entirely expected (or welcome) was the Bank’s statement that it is “still concerned” about risks to the outlook for inflation and “remains prepared to raise” its policy rate “further” if needed.

We capture the Bank’s observations in the summary below.

Inflation facts and housing market commentary

• A slowdown in the Canadian economy is reducing inflationary pressures in a “broadening range” of goods and services prices
• Combined with a drop in gasoline prices, this contributed to easing of CPI inflation to 3.1% in October
• However, “shelter price inflation” picked up, reflecting faster growth in rent and other housing costs along with the continued contribution from elevated mortgage interest costs
• In recent months, the Bank’s preferred measures of core inflation have been around 3.5-4%, with the October data coming in towards the lower end of this range
• Wages are still rising by 4-5%

Canadian economic performance

• Economic growth “stalled through the middle quarters of 2023 with real GDP contracting at a rate of 1.1% in the third quarter, following growth of 1.4% in the second quarter
• 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
• Exports and inventory adjustment “subtracted” from GDP growth in the third quarter, while government spending and new home construction provided a boost
• The labour market continues to ease: job creation has been slower than labour force growth, job vacancies have declined further, and the unemployment rate has risen modestly
• Overall, these data and indicators for the fourth quarter suggest the economy is “no longer in excess demand”

Global economic performance and outlook 

• The global economy continues to slow and inflation has eased further
• 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, has reduced inflationary pressures
• Oil prices are about $10-per-barrel lower than was assumed in the Bank’s October Monetary Policy Report
• 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

Summary and Outlook

Despite (or in the Bank’s view because of) further signs that monetary policy is moderating spending and relieving price pressures, it decided to hold its policy rate at 5% and to continue to normalize its balance sheet.

The Bank also noted that it remains “concerned” about risks to the outlook for inflation and remains prepared to raise its policy rate further if needed. The Bank’s Governing Council also indicated it wants to see further and sustained easing in core inflation, and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and “corporate pricing behaviour.”

Once again, the Bank repeated its mantra that it “remains resolute in its commitment to restoring price stability for Canadians.” As a result, we will have to wait until next year for any sign of rate relief.

What’s next?

The Bank’s next interest rate announcement lands on January 24, 2024 and we will follow immediately after with an executive summary.

In the meantime, please speak to First National to discuss financing options that will empower you in this economic cycle and the ones ahead.