The Bank of Canada held its overnight rate at five per cent on Wednesday, as Canada’s economy continues to slow and there are indications that supply and demand are now approaching balance.
Interest rate increases have dampened economic growth, with Canadian economic growth averaging one per cent this year. The economy is expected to remain weak throughout 2024, before picking up to 2.5 per cent in 2025.
“We’ve been expecting the economy to slow and the data we’ve been receiving is showing that slowly, and in fact, the economy has slowed a little more than we were predicting back in July,” said Bank of Canada governor Tiff Macklem during a press conference with reporters in Ottawa on Wednesday.
The bank said it remains concerned that progress towards its target rate of two per cent remains slow. Oil prices are higher than expected, and there is a risk they may go higher if the Israel-Gaza war turns into a regional conflict. On the domestic side, inflation expectations among households and businesses remain high, which also pose a risk to the central bank’s ability to get back to target, it said.
“Furthermore, businesses may be slower to adjust their pricing behaviour,” reads the Monetary Policy Report (MPR), released on Wednesday. “In addition, if the labour market remains tight or productivity growth remains weak, cost pressures could be higher and more persistent than projected.”
In September, inflation was at 3.8 per cent, down from four per cent in August. The bank expects the consumer price index to remain at 3.5 per cent until the middle of next year, before easing back to its two per cent target in 2025.
Macklem would not rule out the need to raise rate higher, if underlying inflation measures begin to tick up again.
“There’s always going to be a certain amount of volatility and headline CPI inflation,” said Macklem. “We’ve been very deliberate. We’re leaving the door open to further interest rate increases because there is uncertainty about that and if we see inflationary pressures persist, we are prepared to raise our interest rate further.”
Jules Boudreau, senior economist at Mackenzie Investments, thinks the next few rate decisions will be uneventful, with growth too soft to support hikes, but inflation too high to justify cuts.
“The bank will be forced to walk on the 5% tightrope for a few quarters,” he wrote in email to CTV News. “But it won’t want to repeat its error from January, when it suggested that rates had reached their peak, before resuming hikes in June. The bank’s credibility took a hit.”
High shelter costs are causing inflationary pressures in the Canadian economy. Canadian households are paying more in rental and mortgage costs. While delinquency rates on mortgages remain at an all-time low, the share of borrowers falling behind on payments by 60 days in other credit products has increased.
“In particular, delinquency rates for motor vehicle loans have surpassed pre-pandemic levels,” reads the MPR.
The central bank remains concerned the economy could slow down faster than it expects, with businesses and households cutting back on investment and consumer spending more than expected.
The bank also points to monetary policy tightening potentially triggering market volatility that could lead to sharp slowdowns in global growth.
“Monetary policy is tight in most advanced economies, and bond yields have risen sharply in recent weeks, reaching levels not seen since before the 2008-09 global financial crisis,” reads the release. “If the increase in yields proves to larger or more persistent than expected, equity and other asset prices could be negatively impacted further.”
Macklem said the central bank is still not predicting a recession, but that a few quarters of near-zero GDP growth could also turn into a few quarters of negative growth.
“When people say the word recession I think what they have in mind is a steep contraction and output and a large rise in unemployment,” Macklem said. “We’ve been saying for some time that the path to a soft landing is narrow and in this projection that path has gotten narrower.”
The next rate announcement is expected on Dec. 6. The next Monetary Policy Report is expected on Jan. 24.