In its most recent decision, the Bank of Canada has chosen to keep the overnight rate at 5%, the Bank Rate at 5¼% and the deposit rate at 5%. Furthermore, the Bank continues to adhere to its policy of quantitative tightening, as reported by the Bank of Canada's official statement.
The central banks worldwide have been on high alert due to persistent elevated core inflation despite some reduction in overall inflation levels in advanced economies. The global economy experienced a slowdown during the second quarter of 2023, primarily driven by a significant deceleration in China's economic growth. Lingering weaknesses in China's property sector have dampened confidence and diminished growth prospects. In contrast, the United States saw stronger-than-expected growth, driven by robust consumer spending, while Europe's growth was supported by a strong service sector despite ongoing manufacturing contraction. Global bond yields have risen, reflecting higher accurate interest rates, and international oil prices have exceeded previous expectations.
Canada's economy has entered a slower growth phase to alleviate inflationary pressures. Economic growth sharply decelerated in the second quarter of 2023, resulting in a 0.2% annualized contraction in output. This decline can be attributed to a significant weakening in consumption growth, a dip in housing activity, and the impact of wildfires across several regions in the country. Higher interest rates have also tempered household credit growth, impacting a broader spectrum of borrowers. Government spending and increased business investment have supported final domestic demand despite gradually easing labor market tightness. Wage growth, however, remains in the range of 4% to 5%.
Recent Consumer Price Index (CPI) data point to widespread inflation pressures. After dipping to 2.8% in June, CPI inflation climbed to 3.3% in July, averaging around 3%, consistent with the Bank's projections. The recent rise in gasoline prices is expected to elevate CPI inflation before easing temporarily. Year-over-year and three-month measures of core inflation now stand at approximately 3.5%, indicating limited recent downward momentum in underlying inflation. The longer high inflation persists, the more challenging it becomes to restore price stability.
Considering signs of easing excess demand in the economy and the lagged effects of monetary policy, the Governing Council has chosen to maintain the policy interest rate at 5% while normalizing the Bank's balance sheet. However, the Governing Council remains vigilant regarding the persistence of underlying inflationary pressures and stands ready to raise the policy interest rate further if necessary. Critical factors in determining future rate decisions include core inflation dynamics, CPI inflation prospects, evolving excess demand, inflation expectations, wage growth, and corporate pricing behavior. The Bank's unwavering commitment remains focused on reinstating price stability for Canadians.
Prediction for the Year-End: Based on the current economic conditions and the Bank of Canada's commitment to price stability, it is likely that the central bank will continue to monitor inflation closely. If core inflation remains persistently high and excess demand continues to pose a threat, the Bank of Canada may consider further rate hikes to combat inflation by the end of the year. However, this will depend on the evolving economic landscape and the effectiveness of their current policies in curbing inflationary pressures.