Bank of Canada Holds Policy Rate at 5%, Continues Looking for More Evidence of Downward Momentum in Inflation

The Bank of Canada decided to maintain its target for the overnight lending rate at 5%. The move was widely expected by financial markets and marked the Bank’s sixth consecutive hold after two interest rate hikes last summer.

In a scheduled announcement on Wednesday, April 10, 2024, the Bank noted that while Canada’s economy had stalled in the second half of 2023, it was expected to pick up in 2024 due to strong population growth, a pickup in household spending, strong demand for housing, increased government spending, stronger export growth, and a recovery in business investment.

The Bank also made note of easing labour market conditions as the growth in the working-age population continues to outpace employment growth.

Updating its forecasts, the Bank now projects the Canadian economy will grow 1.5% in 2024 and 2.2% in 2025 before slowing to 1.9% in 2026.

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In its Monetary Policy Report, the Bank mentioned the gap between the recent strength in population growth and ongoing shortage in housing supply which is not expected to close over the next two years, noting housing starts have been coming in well below demographic demand. This was also one of the main risks identified in its outlook for inflation, with strong demand boosting inflation by raising shelter costs.

The Bank continues to focus on elevated shelter costs as the largest contributing factor to above-target inflation, which it expects to return to its 2% target by the end of 2025. However, it also noted that both headline and core measures of inflation are showing signs of moderating and “will be looking for evidence that this downward momentum is sustained.”

The Bank is also likely awaiting news on spending from the next federal budget due to be tabled on April 16, 2024, as well as the impact of the Carbon Tax increase that came into effect on April 1.

Check back on CREA Café for a full, detailed analysis of the 2024 Federal Budget.

Of note, the Bank also revised its estimate of the neutral interest rate in Canada up 0.25%, largely due to a corresponding upward revision to the US neutral rate. The neutral rate of interest is the rate at which economic output is running at its potential and inflation is on target. The Bank’s nominal neutral rate is now in the range from 2.25% to 3.25%.

The Bank of Canada’s next scheduled interest rate announcement will be on June 5, 2024, and will publish its full outlook for the economy and inflation in its next Monetary Policy Report on July 24, 2024.

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