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The Epoch Times
The Epoch Times
25 Oct 2023


NextImg:Bank of Canada Holds Overnight Target at 5%, Downgrades Economic Outlook

OTTAWA—The Bank of Canada held its policy interest rate at 5 percent and downgraded its growth forecast for the economy on Oct. 25. The central bank said that inflation’s progress toward the 2 percent target is slow and uncertain.

No suggestions or indications were given of a possibility of rate cuts or an imminent recession.

“Governing Council is … prepared to raise the policy rate further if needed,” the BoC said in its press release. This statement reflects the central bank’s concern that “progress towards price stability is slow and inflationary risks have increased.”

Due mostly to higher energy prices and persistent core inflation, the central bank expects inflation to now average about 3.5 percent through mid-2024 before coming down to 2 percent in mid-2025.

Annual inflation came in at 3.8 percent for September, and the central bank said inflation has been “volatile in recent months.”

The central bank said three-month core inflation measures are elevated and have been in the 3.5 percent to 4.5 percent range over the past year. The BoC thus said there is more persistence to inflation than what was expected in July when it last provided detailed economic forecasts.

“Near-term inflation expectations are still high, and there is a risk that they could become a driver of a wage- and price-setting behaviour,” the BoC said in its October monetary policy report (MPR).

Wages are growing in the 4 percent to 5 percent range, the central bank points out, and that businesses continue to raise prices more frequently and by larger amounts than normal.

The BoC said that while food inflation is coming down from very high levels, inflation in mortgage interest costs, rent, and other housing costs remains high.

Slowing Economy

The BoC now expects the economy to grow by 1.2 percent in 2023—down from a projection of 1.8 percent in July. The growth forecasts for 2024 and 2025 are slightly lower than those in July as well at 1.2 percent and 2.4 percent respectively.

“Spending by governments contributes materially to growth over the forecast horizon,” the BoC said. For 2024, government spending is projected to make up two-thirds of economic growth.

The central bank tracks the growth in government spending through budgets and other announcements and said it is growing at 2.5 percent—faster than the economy’s potential growth rate.

The central bank says that while the economy is moving from a state of excess demand into one where demand and supply are more balanced, it also cautions that wage pressures are persisting and the labour market is still on the tight side.

The BoC projects the economy to move into a state of excess supply in the fourth quarter of 2023 and for excess supply to grow during 2024.

In its MPR, which includes a new set of forecasts for growth and inflation, the central bank explained how higher interest rates have been slowing demand.

“The most immediate impact has been an increase in the cost of new or existing debt,” the BoC said, adding that higher rates encourage households to spend less and save more.

The rise in interest rates has cooled demand for big-ticket items and consumption has stalled. The central bank says that for 85 percent of categories of consumer spending, the pace of growth has decelerated, with the notable exception being motor vehicles.

Financial markets and economists were widely expecting the BoC to hold its overnight rate target at 5 percent given the recent weakness in the economy and headline inflation moving lower in September.