Bank of Canada Holds Interest Rate But Sounds Cautious Note

October 25, 2023 - The Bank of Canada (BoC) held the line on its benchmark interest rate for the second consecutive meeting. The rate remains at 5%, but the Bank sounded a note of caution - despite some signs of softening in the economy, inflation pressures are not easing as quickly as they would like. In its press release, the Bank said "Governing Council is concerned that progress towards price stability is slow and inflationary risks have increased, and is prepared to raise the policy rate further if needed." It forecasts that inflation will not return to the 2% target until 2025; in 2024, it will average about 3.5% through the middle of the year. The BoC also repeated its commitment to watching the core measures of inflation and having them also fall to 2%.

The BoC identified energy costs, mortgage interest costs, rent and other housing costs as drivers of inflation. With all of these pressures, the Bank is forecasting a 1.2% GDP increase this year (which does not rule out a recession, although if one comes, it would probably be relatively mild). Their forecast for 2024 is 0.9% growth, indicating prolonged weakness before a recovery to 2.5% growth in 2025.

The press release closed with "The Bank remains resolute in its commitment to restoring price stability for Canadians", which is still somewhat hawkish. However, pundits are not expecting another rate increase this year, given the softening economy. You can read the full release here.