The Bank of Canada has made an anticipated decision to raise its overnight interest rate to 5.00%, marking a 0.25% increase from June. The decision was driven by the Bank’s observation of sustained excess demand and elevated core inflation, along with their revised outlook for economic activity and inflation.

Notably, the Bank’s commitment to quantitative tightening has raised concerns. To shed light on the decision and the Bank’s current perspective on inflation, interest rates, and the economy, we present the Bank’s latest observations below:

Inflation Facts and Outlook:
• Canada’s Consumer Price Index (CPI) inflation dropped to 3.4% in May, a significant decrease from its peak of 8.1% last summer.
• The downward momentum in CPI inflation has been largely influenced by lower energy prices, while underlying inflation pressures have been less relieved.
• With the removal of last year’s substantial price increases from annual data, there will be less immediate downward pressure on CPI inflation.
• Core inflation rates of around 3.5% to 4% since September, along with business surveys indicating persistent price pressures, suggest underlying inflation is more persistent than anticipated.
• Global inflation is easing due to lower energy prices and a decline in goods price inflation, but services are experiencing persistent inflationary pressures due to robust demand and tight labor markets.
Canadian Housing and Economic Performance:
• Canada’s economy has exhibited stronger-than-expected performance, with notable momentum in demand.
• First-quarter consumption growth was surprisingly robust at 5.8%.
• Although the Bank anticipates a slowdown in consumer spending as a response to cumulative interest rate increases, recent data indicates ongoing excess demand in the economy.
• The housing market has seen some improvement, with new construction and real estate listings lagging behind demand, putting pressure on prices.
• While signs of increased worker availability are emerging in the labor market, conditions remain tight, and wage growth has been around 4-5%.
• Strong population growth from immigration is contributing to both demand and supply in the economy, easing worker shortages and boosting consumer spending and housing demand.

Global Economic Performance and Outlook:
• Economic growth has been stronger than expected, particularly in the United States, where consumer and business spending have remained resilient.
• China’s economic growth, after a surge earlier in 2023, is softening due to slowing exports and ongoing weakness in the property sector.
• Growth in the euro area is effectively stagnant, with the service sector growing but manufacturing contracting.
• Global financial conditions have tightened, with bond yields rising in North America and Europe as major central banks signal potential further interest rate increases to combat inflation.
• The Bank’s July Monetary Policy Report projects global economic growth of around 2.8% in 2023 and 2.4% in 2024, followed by 2.7% growth in 2025.

Summary and Outlook:
• As higher interest rates continue to impact the economy, the Bank of Canada expects a slowdown in economic growth, with an average of around 1% in the second half of 2023 and the first half of 2024. This implies real GDP growth of 1.8% in 2023 and 1.2% in 2024.
• The Canadian economy is expected to experience modest excess supply early next year before picking up to 2.4% growth in 2025.
• CPI inflation is projected to hover around 3% for the next year before gradually declining to 2% by mid-2025. This return to target is slower than previously forecasted, raising concerns for the Bank’s commitment to price stability.
• The Bank remains committed to monitoring core inflation dynamics, CPI inflation outlook, excess demand evolution, inflation expectations, wage growth, and corporate pricing behavior. They aim to assess the consistency of these factors in achieving the 2% inflation target.

Stay tuned: Please mark September 6th, 2023, on your calendar for the Bank’s next scheduled policy rate announcement. We will provide an executive summary of the decision on that day. In the meantime, Sunlite Mortgage’s knowledgeable advisors are available to help you understand key economic news and market trends.