September 2023 Interest Rates: BoC Holds Steady

The Bank of Canada has maintained its overnight rate at 5%, with the Bank Rate and deposit rate at 5¼% and 5% respectively, while continuing its quantitative tightening policy. Global inflation has seen a decline in advanced economies, but core inflation remains high, leading major central banks to prioritize price stability. Global growth slowed in Q2, primarily due to a significant slowdown in China's economy. The US experienced stronger-than-expected growth, particularly in consumer spending, while Europe saw growth, driven by the service sector despite manufacturing contraction. Global bond yields increased due to higher real interest rates, and international oil prices exceeded July's projections.

Canada's economy has entered a phase of weaker growth to alleviate inflation pressures. Q2 2023 witnessed a 0.2% annualized contraction, mainly due to weakened consumption, declining housing activity, and the impact of wildfires. Household credit growth slowed as higher rates curbed spending across various borrower segments. Government spending and increased business investment supported a 1% growth in final domestic demand. The tight labour market has gradually eased, but wage growth remains at 4% to 5%.

CPI data indicate persistent inflationary pressures, with CPI inflation averaging near 3%. Core inflation measures remain around 3.5%, showing limited downward momentum. The Bank is concerned that prolonged high inflation could become entrenched, hampering price stability restoration.

The Bank will maintain its policy rate at 5% and continue to normalize its balance sheet due to easing excess demand. However, it remains vigilant about underlying inflation pressures and is ready to increase the rate further if necessary. The Bank will assess core inflation dynamics, CPI outlook, excess demand, inflation expectations, wage growth, and corporate pricing behaviour to achieve its 2% inflation target and restore price stability. The Bank is committed to this goal for Canadians' benefit.

Information via www.bankofcanada.ca