The weaker Canadian economy is influencing interest rates, at least for the meantime.
On Wednesday, the Bank of Canada announced that it was holding its target for the overnight rate of five per cent, with the bank rate at five and one-quarter and the deposit rate at five per cent. The BOC also intends to continue with its policy of quantitative tightening.
The second quarter was the impetus behind the held rate, as economic growth significantly slowed, contracting by 0.2 per cent at an annualized rate. Canadians spent less overall, and a decline in the number of homes built and the wildfires impacting much of the country proved to be a three-pronged effect.
Government spending and business investments boosted the final domestic demand by one per cent in the second quarter, and the strain on the labour market continues to ease. However, wage growth has remained around four to five per cent.
Rate pause may be short-lived
CPI data shows that various factors have influenced the pressures of inflation. Inflation eased in June, dropping to 2.8 per cent, but increased to 3.3 per cent in July, landing close to the BOC’s projection of three per cent. Gas prices have jumped again, and CPI is expected to be higher in the near future before backing off once more.
However, year-over-year and three-month measures of core inflation are currently running at approximately 3.5 per cent. This is a warning sign that there has been little progress in changing the momentum of underlying inflation. The longer high inflation continues, the more likely the current situation becomes the norm, making it far more challenging to return to price stability.
This underlying inflation is why the BOC is not holding off on raising rates again shortly. The bank states that it will be “evaluating whether the evolution of excess demand, inflation expectations, wage growth, and corporate pricing behavior are consistent with achieving the two per cent inflation target” to make further decisions on interest rates. The next scheduled date for announcing the overnight rate target is October 25, 2023.
