2023-09-06 13:27:59
The Bank of Canada announced today that it is maintaining the target for the overnight rate at 5%. The official discount rate remains at 5¼%, and the deposit rate at 5%. Similarly, the Bank is continuing its quantitative tightening policy.
In advanced economies, inflation continued to decline. However, as measures of core inflation remain elevated, the focus of major central banks remains on restoring price stability. Global growth slowed in the second quarter of 2023, largely reflecting the considerable deceleration of the Chinese economy. Given the continued weakness in the real estate sector and its impact on confidence, growth prospects in China have diminished. In the United States, growth was stronger than expected, driven by robust consumer spending. In Europe, the strength of the services sector supported the expansion and offset the ongoing contraction in the manufacturing sector. Global bond yields have risen, reflecting higher real interest rates, and global oil prices are higher than assumed in the Monetary Policy Report of July.
The Canadian economy has entered a period of weaker growth, necessary to reduce price pressures. Economic expansion slowed markedly in the second quarter of 2023 as output contracted 0.2% at an annualized rate. This reflects a sharp decline in consumption growth and a decline in activity in the housing sector, as well as the impact of wildfires in many parts of the country. Growth in household credit slowed as higher interest rates reduced spending by a wider range of borrowers. Final domestic demand rose 1% in the second quarter, supported by government spending and a surge in business investment. Labor market tensions continued to ease gradually. However, wage growth has remained around 4-5%.
Recent consumer price index (CPI) data show that inflationary pressures remain widespread. After dropping to 2.8% in June, CPI inflation rose to 3.3% in July. It therefore stood at almost 3% on average, which corresponds to the Bank’s projection. Given the recent rise in gas prices, CPI inflation should be higher in the near term, before coming down once more. Measures of one-year and three-month core inflation are now around 3.5%, indicating that there has been almost no downward movement in core inflation recently. The longer high inflation lasts, the more it is likely to take root and the more difficult it becomes to restore price stability.
Given recent signs that excess demand is waning in the economy, and the effects of monetary policy are being felt with a lag, the Governing Council decided to keep the policy rate at 5% and continue to normalize the Bank’s balance sheet. However, the Board remains concerned regarding the persistence of underlying inflationary pressures and stands ready to raise the policy rate once more if necessary. It will continue to assess core inflation dynamics and the outlook for CPI inflation. In particular, it will assess whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing practices are compatible with achieving the 2% inflation target. The Bank remains committed to restoring price stability for Canadians.
Note d’information
The next target date for the overnight rate is October 25, 2023. The Bank will release its next full projection for the economy and inflation, along with an analysis of related risks, in the Monetary Policy Report which will also appear on that date.
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