The Bank of Canada has taken decisive action to rein in economic growth and combat inflation, increasing its overnight rate target to 5%, Bank Rate to 51⁄8%, and deposit rate to 5%. In addition, it has continued to enforce its quantitative tightening policy to reduce the amount of money in circulation.
The global rate of inflation is decreasing due to lower energy prices and a decline in the inflation of goods prices. However, there are still inflationary pressures in the service sector due to strong demand and tight labor markets. The economy has been growing more than expected, particularly in the United States, where consumer and business spending has been resilient. China's economic growth has slowed down due to a decline in exports and ongoing weaknesses in its property sector, despite a surge in early 2023. The euro area's growth has effectively stalled, with manufacturing contracting while the service sector continues to grow. Global financial conditions have tightened, with bond yields increasing in North America and Europe as major central banks signal that further interest rate increases may be necessary to combat inflation.
The Monetary Policy Report in July suggested the world economy is set to expand at a rate of 2.8% this year and 2.4% in 2024, before settling on 2.7% growth in 2025. Canada, it appears, is performing above projections, having witnessed an unpredicted growth in consumer demand with a 5.8% boost in the first quarter. It is anticipated that this increase will slow down with higher interest rates, though more current retail and trade data may be signifying that the boost is going to persist for longer. Additionally, the housing market is blooming but new constructions and real estate listings are few and far between, causing prices to climb. Lastly, the labor market is revealing more open positions, though wages have only been rising at 4-5%, with a jump in the number of immigrants adding to the demand and supply.
With higher interest rates affecting the entire economy, economic growth is predicted to slow down, likely falling to an average of 1% during the second half of this year and the first half of next. That would lead to a 1.8% growth in GDP in 2023 and 1.2% in 2024, before reaching 2.4% growth in 2025. Consumer price index (CPI) inflation dropped to 3.4% in May of this year, a stark decrease from the 8.1% in the summer of 2020. Though the CPI is on a downward trajectory as predicted, it is mostly energy costs which have gone down and the underlying inflation has remained unchanged. Furthermore, the core inflation has held between 31⁄2-4% since September 2020, signaling consistent inflation.
Hence, as reported in the July MPR, it is estimated that the CPI will stay around the 3% mark in the upcoming year before eventually easing to the 2% target in mid-2025. Nonetheless, Governing Council is aware that the progress towards this objective could slow, thus they raised the interest rates and applied quantitative tightening to rebalance the Bank's balance sheet. Going forward, they will vigilantly monitor core and CPI inflation, carefully watching out for how expectations, wage growth, and corporate pricing will affect the achievement of the 2% inflation target. As such, the Bank of Canada is resolute in bringing back price stability to its people🇨🇦.
By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929