Decision comes after month of conflicting datapoints and political statements on Canada's economic health
The Bank of Canada has decided to hold its key interest rate steady at 5.00%.
The widely-predicted decision to pause follows a few key datapoints implying sluggishness in Canada’s economy. The BoC’s aggressive rate hiking policy since 2022 has started to significantly impact economic activity. The Canadian economy shrank slightly in Q2 and the labour market has eased slightly.
In September, Canada’s annual inflation rate fell to 3.8%. While still above the Bank of Canada’s 2% inflation target, a downtrend can be seen as a reason for Governor Tiff Macklem to pause the bank’s tightening cycle.
“In Canada, there is growing evidence that past interest rate increases are dampening economic activity and relieving price pressures. Consumption has been subdued, with softer demand for housing, durable goods and many services,” the decision announcement reads. “Weaker demand and higher borrowing costs are weighing on business investment. The surge in Canada’s population is easing labour market pressures in some sectors while adding to housing demand and consumption. In the labour market, recent job gains have been below labour force growth and job vacancies have continued to ease. However, the labour market remains on the tight side and wage pressures persist. Overall, a range of indicators suggest that supply and demand in the economy are now approaching balance.”
Retail sales and consumer confidence were also reported flat in September, with many Canadians facing higher borrowing costs due to rate increases. Discretionary spending on leisure and entertainment is also dropping as Canadians prioritize debt repayment and servicing.
While most economists agreed the Bank of Canada’s tightening policy had sufficiently slowed economic activity, they continued to predict an elevated level of inflation. Gasoline and energy prices, for instance, continue to be volatile in a climate of geopolitical uncertainty and constrained supply.
As the BoC has raised rates, higher cost of mortgage debt and housing has become a larger portion of Canada’s overall CPI increase, effectively contributing to inflation. Canadian households carry a higher percentage of debt than their US counterparts, and the Canadian economy is considered to be much more interest rate sensitive.
According to Bloomberg markets haven’t priced in high odds of a cut or another raise between now and the summer of 2024. Some economists surveyed predicted a cut somewhat earlier, in 2024. Markets continue to predict that the US Federal Reserve may still raise rates one more time this year, reflecting a less interest-rate sensitive economy south of the border.
While unemployment has risen somewhat, analysts interviewed by WP say that the labour market has remained somewhat strong. If Canada’s slowing economy results in more significant layoffs, those analysts predict the downturn could spiral into a full-blown recession.
The BoC’s rate increases have recently been met with some political noise and pressure. In September the Premiers of Ontario, British Columbia, and Newfoundland and Labrador publicly asked Governor Macklem to consider the impact the Bank’s interest rate increases have had on housing costs.
