October 25, 2023 | Market Update
The Bank of Canada has announced that it will keep its target interest rate at 5%. This decision was made because the global economy is slowing down and growth is expected to slow down further. The bank has decided to continue its policy of quantitative tightening. This means that it is reducing the amount of money it lends to keep inflation under control.
The bank predicts that global GDP growth will be 2.9% this year, 2.3% in 2024, and 2.6% in 2025. The economy in the United States is doing better than expected, but economic activity in China has been weaker than expected. Growth in the euro area has also slowed down. Inflation has been easing in most countries as supply bottlenecks resolve and weaker demand relieves price pressures. Oil prices are higher than was assumed in July, and the war in Israel and Gaza is a new source of geopolitical uncertainty.
In Canada, the bank has observed that interest rate increases in the past have affected economic activity, reducing price pressures, and causing lower consumption. Higher borrowing costs and weaker demand are also affecting business investment. Although the labour market remains tight and wage pressures persist, recent job gains have been lower than labour force growth, and job vacancies have continued to decrease.
The bank expects that economic growth in Canada will remain weak for the next year before increasing in late 2024 and through 2025. The near-term weakness in growth reflects both the broadening impact of past increases in interest rates and slower foreign demand. The subsequent pickup will be driven by household spending as well as stronger exports and business investment in response to improving foreign demand.
CPI inflation has been volatile in recent months, with rates at 2.8% in June, 4.0% in August, and 3.8% in September. The bank predicts that inflation will gradually ease to 2% in 2025. The bank is prepared to raise the policy rate further if needed to restore price stability for Canadians.