Thursday, May 23, 2024

Bank of Canada Holds Policy Rate Steady: An In-depth Analysis of the Quantitative Tightening Strategy and Its Economic Implications


Bank of Canada Maintains Policy Rate, Continues Quantitative Tightening

In a significant announcement today, the Bank of Canada decided to keep its overnight rate target steady at 5%, with the Bank Rate at 5.25% and the deposit rate at 5%. This decision marks a continued commitment to quantitative tightening by the institution.

The Bank anticipates the global economy to grow at an approximate rate of 3%, witnessing a gradual easing of inflation across most advanced economies. The United States, in particular, has displayed stronger economic resilience than expected, supported by sturdy consumption as well as solid business and government expenditure. While there’s a projected slowdown in the US GDP growth later this year, it remains robust, surpassing earlier forecasts. The euro area is also on a path to recovery, overcoming its current growth slump. Additionally, a noticeable increase in global oil prices and financial conditions, characterized by higher bond yields yet lower corporate credit spreads and surging equity markets, were observed.

A revised forecast by the Bank now puts global GDP growth at 2.75% for 2024, with a consistent increase to about 3% for 2025 and 2026. Although inflation is on a downtrend in most developed nations, reaching the central bank’s targets is projected to be a staggered journey, with inflation rates expected to normalize by 2025.

Turning to Canada, a stagnation in economic growth was noted in the latter half of the previous year, leading the country into a phase of excess supply. The labor market appears to be loosening, with employment growth lagging behind the pace of the working-age population increase, pushing up the unemployment rate to 6.1% in March. Signs are also emerging that wage pressures might be waning.

Economic expansion in Canada is predicted to rebound in 2024, fueled by robust population growth and a resurgence in household spending. There’s a strengthening in residential investment, buoyed by persistent, strong housing demands. Government spending is also contributing more significantly to growth. Despite the substantial dip in the latter half of the previous year, business investment is expected to gradually recover. The Bank remains optimistic about the solid growth of exports extending through 2024.

The Bank forecasts a GDP growth of 1.5% in 2024, followed by 2.2% in 2025, and 1.9% in 2026. It is anticipated that the strengthening economy will gradually eliminate the excess supply plaguing the market through 2025 and continuing into 2026.

CPI inflation, which stood at 2.8% in February, is showing signs of a more widespread slowdown across both goods and services, even though shelter price inflation remains high due to rising rent and mortgage interest costs. Core inflation measures are also decelerating, suggesting downward momentum. The Bank projects CPI inflation to hover around 3% in the first half of this year, dip below 2.5% in the latter half, and finally meet the 2% inflation target by 2025.

Given the current outlook, the Governing Council resolved to retain the policy rate at 5% while proceeding to normalize the Bank’s balance sheet. Despite CPI and core inflation showing further signs of easing, inflation rates remain concerningly high. The Council is keen on observing sustained diminishing trends in inflation rates. Special attention is being given to the trajectory of core inflation, demand and supply balance in the economy, inflation expectations, wage growth trends, and corporate pricing behaviors. The Bank unequivocally underlines its commitment to reinstating price stability for Canadians, upholding a vigilant stance towards future economic developments.

Jordan Clark
Jordan Clark
Jordan Clark brings a dynamic and investigative approach to business reporting. Holding a degree in Business Administration and a certification in Data Analysis, Jordan has an eye for detail and a knack for uncovering the stories behind the numbers. His career began in the bustling world of Silicon Valley startups, giving him firsthand experience in tech entrepreneurship and venture capital. Jordan's reports often focus on technology's impact on business, startup culture, and emerging

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