On Wednesday, the Bank of Canada maintained its goal of five per cent for the overnight rate, five per cent for the bank rate, and five percent for the deposit rate. The Bank is sticking to its quantitative tightening strategy.
In the fourth quarter, the growth of the world economy slowed. Even while US GDP growth slowed, it was still remarkably strong and wide-ranging, with strong contributions from exports and consumption. After shrinking in the third quarter, the economic growth in the euro area was flat at the end of the year. Both the euro zone and the US saw further declines in inflation. Since January, corporate credit spreads have contracted while bond yields have risen. The stock markets are up significantly. The January Monetary Policy Report (MPR) expected a somewhat lower price for oil globally.
The Canadian economy expanded in the fourth quarter at a faster rate than anticipated, but the pace remained weak. The real GDP shrank by 0.5 per cent in the third quarter before increasing by one per cent. A significant drop in business investment led to a contraction in final domestic demand, while consumption increased by a meagre one per cent. Growth was stimulated by a robust increase in exports. There are currently some indications that wage pressures may be lessening, and employment is still growing more slowly than the population. All things considered, the numbers suggest a somewhat oversupplied economy.
In January, CPI inflation decreased to 2.9 per cent as the inflation of goods prices continued to decline. Shelter price inflation remains high. The underlying inflationary pressures are still present: the fraction of CPI components expanding above 3% fell but is still higher than the historical norm, and core inflation measures over the last year and the last three months fell between three per cent and 3.5 per cent. The Bank is still projecting that inflation will hover around three per cent for the first part of this year before progressively declining.
The Governing Council made the decision to keep the Bank’s balance sheet normal and to maintain the policy rate at five per cent. The risks to the inflation forecast continue to worry the Council, especially the continuation of underlying inflation. The Governing Council is still focused on the economy’s demand-supply balance, inflation expectations, wage growth, and company pricing practices. It also wants to see further and sustained softening of core inflation. The Bank is unwavering in its resolve to bring back pricing stability for citizens of Canada.
