OTTAWA—The Bank of Canada, as widely predicted, held its key interest rate at 5 percent on Dec. 6 and said it “remains prepared to raise the policy rate further if needed.”
The BoC statement described the recent weakening of the Canadian economy but didn’t change its language from its prior interest rate decision on Oct. 25 regarding its next most likely move. The central bank has now kept its overnight rate target at 5 percent for three straight decisions following July’s rate hike.
The central bank said that recent economic data “suggest the economy is no longer in excess demand.” In October, the BoC said supply and demand were “approaching balance,” as suggested by a range of indicators.
Inflation has fallen from 5.9 percent in January to 3.1 percent in October, but measures of core inflation remain a bit higher at 3.5 to 3.6 percent. In its October projections, the Bank of Canada said it expected inflation to return to the 2 percent target by mid-2025.
The BoC said it wants to see “further and sustained easing in core inflation.”
While the central bank said the slowdown in the economy “is reducing inflationary pressures in a broadening range of goods and service prices,” it also noted that “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 BoC pointed to economic growth contracting at a rate of 1.1 percent in the third quarter and that consumption growth in the last two quarters was basically flat.
The unemployment rate at 5.8 percent in November has been gradually moving higher since April.
But there are still areas of economic strength. The central bank noted that wages are still rising by 4 to 5 percent and government spending and new home construction are boosting the economy.
Looking for Cuts
Financial markets have rallied since the Bank of Canada’s previous interest rate decision in October on the hopes of rate cuts as inflation comes down and the potential to avoid a recession.
As of the close on Dec. 5, the Toronto Stock Exchange index is up 7.5 percent since Oct. 25 and the Canadian dollar is up 1.5 percent.
The Canadian 10-year bond yield has plunged about 0.75 percentage points, meaning bond prices have increased sharply.
The price of crude, as measured by West Texas Intermediate, is down about 15 percent. The BoC said oil prices are about $10-per-barrel lower than what was assumed in October.
The BoC’s statement noted this easing of financial conditions and the slowing global economy and inflation.
The central bank’s next rate decision comes January 24, 2024, along with a new set of quarterly economic projections.