This morning, the Bank of Canada announced it would be maintaining its trend-setting interest rate at 5%, where it’s been since July 2023 following an unprecedented regimen of rate hikes in magnitude, duration, and speed.
The Bank notes that global inflation continues to abate, including here in Canada, where the headline inflation rate sits at 3.4% (as of December). This is outside of the Bank’s target range of 1-3% for inflation, but it’s down significantly from a peak of 8.1% in June 2022.
The driving forces behind slowing inflation include a flagging Chinese economy, lower energy prices (notably, the price of crude oil is about $10 lower than the Bank had expected back in October 2023), and tighter monetary policy, with higher interest rates creating a relative disincentive to borrow and spend and a relative incentive to save. In a seemingly ironic twist ( that we've noted previously ), higher interest rates are actually feeding back into inflation, with the mortgage interest cost component of the Consumer Price Index (CPI) rising 29% year-over-year; excluding this element, the annual rate of inflation for all other goods and services sat at 2.5% in December—the 7th month out of the past eight where the CPI, excluding mortgage interest cost, rose by less than 3%.
While the Bank’s hold was widely expected, attention now turns to their upcoming meetings. At this time, we see the Bank holding again in March before strongly considering a 25-basis-point cut to its policy rate (to 4.75%) in April.
