Oct 26, 2023 Interest rates

Yesterday came at a bit of a shock,  the Bank of Canada only increased interest rates by 50 basis points.  Making the Overnight rates 3 ¾,  with the bank rate at 4% and the deposit rate at 3 ¾. The Bank of Canada continues its policy of quantitative tightening.  It was expected that they would do 75 basis points,  as they need to take control of the global inflation crisis.  

Inflation around the world remains high and broadly based.  This is a direct consequence of the global recovery from the COVID pandemic,  several global supply disruptions,  high commodity prices, particularly energy and food, which have been increased by the war in Ukraine.  In many other countries they are seeing inflationary pressure for the strong US dollar.   Many countries around the world are tightening their monetary policies to control inflation,  with the tightening polies global inflation is expected to come down.  We hope that inflation will come down to their target of 2% as fast as possible.  

In Canada,  the labour markets remain very tight even as restrictive financial conditions are slowing the economic activity.  The banks expect that there will be no growth in the economy for the majority in 2023.   In European countries,  the economy is projected to contract in the 1st quarter of next year.   This is mainly due to the energy shortage.   Other economies like China appear to be picking up after pandemic lockdowns,  although ongoing challenges related to its property market will continue to weigh on growth.  Overall, the Bank anticipates that global growth will shrink from 3% in 2022 to about 1½% in 2023, and then pick back up to roughly to 2½% in 2024. This is a slower pace than what was projected from the Bank’s back in July.

The Canadian economy continues to have excess demand and the labour market remains strong.   The need for goods and services is running in front of the economy’s ability to supply those goods and services,  putting pressure on inflation.  The widespread labour shortage across most industries and the fully reopening of the economy, the large demand for these products and services have led to a major increase in these services.  

Inflation has decreased in the last 3 months from 8.1% to 6.9%,  mainly due to the decrease in gas prices.  With gas prices going back up,  there isn't any realistic expectation to stay at 6.9%. The Bank’s measures of core inflation do not show evidence of slowing prices to the point where they can get to the target of 2% inflation.  The Bank expects inflation to decrease as interest rates increase and help balance the supply and demand issues we are facing.   CPI inflation is projected to have inflation down to 3% by the end of 2023,  and to hit their target of 2% by the end of 2024.  

The Governing Council expects that the interest rates will continue to increase even with ongoing demand pressuring the economy.   Additionally interest rates increase are expected as the need to slow down demand in the economy is prior to decrease in interest rates.  Quantitative tightening is complementing increases in the policy rate. We are resolute in our commitment to restore price stability for Canadians and will continue to take action as required to achieve the 2% inflation target.

There is a concern that the 50 basis points that was released on Oct 26, 2022.  Was not enough to help decrease inflation,  concerning some that this may drag out longer than it needs to.   The next announcement is on December 7, 2022.  The bank will publish its next full outlook for the economy and inflation including risks to the projection, in the MPR on Jan 25, 2023.  

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