In the latest decision by the Bank of Canada, the target for the overnight rate has been held at 5%, with the Bank Rate at 5¼% and the deposit rate at 5%. This move signals a continuation of the bank’s policy of quantitative tightening, aimed at managing economic growth and inflation within the country.
Looking globally, the fourth quarter saw a slowdown in economic growth. Despite this, the United States experienced surprisingly robust GDP growth, driven by strong contributions from both consumption and exports. However, the euro area struggled, with economic growth remaining flat at the end of the year after a contraction in the previous quarter. Inflation rates in the US and the euro area continued to ease during this period.
Within this context, Canadian economic performance in the fourth quarter exceeded expectations, with GDP growth of 1% following a 0.5% contraction in the third quarter. However, the pace of growth remained weak and below potential. Consumption showed a modest increase of 1%, while final domestic demand saw a decline, primarily due to a significant drop in business investment. Despite these challenges, a strong increase in exports helped to bolster growth.
Employment growth in Canada continues to lag behind population growth, and there are indications that wage pressures may be easing. The overall data suggest an economy operating with modest excess supply.
In terms of inflation, CPI inflation eased to 2.9% in January, driven by moderation in goods price inflation. However, shelter price inflation remains high and is the primary contributor to overall inflation. Core inflation measures, including year-over-year and three-month figures, remain in the 3% to 3.5% range. While the share of CPI components growing above 3% has declined, it remains above historical averages.
Given these economic conditions, the Governing Council of the Bank of Canada has decided to hold the policy rate at 5% and to continue normalizing the Bank’s balance sheet. The Council remains concerned about risks to the inflation outlook, particularly regarding the persistence of underlying inflation. They emphasize the need for further sustained easing in core inflation and continue to monitor factors such as demand and supply balance, inflation expectations, wage growth, and corporate pricing behavior.
Looking ahead, the Bank of Canada will announce its next overnight rate target on April 10, 2024. Alongside this announcement, the bank will publish its full outlook for the economy and inflation, including any identified risks, in the Monetary Policy Report (MPR).
In conclusion, the Bank of Canada maintains its commitment to restoring price stability for Canadians, navigating the challenges of a global economic slowdown and evolving inflationary pressures with a cautious and strategic approach.