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Canada Monetary Policy November 2023

Canada: Central Bank stays put in December

On 6 December, the Bank of Canada (BOC) left the target for the overnight rate at 5.00%, and announced it was continuing to reduce the stock of outstanding government bonds.

The decision to not hike rates further was driven by stalling economic activity, a softening labor market and falling headline and core inflation—core inflation was within the Bank’s 1.0%–3.0% target for the second straight month in October, following more than two years above target. However, given that core inflation is still near the top of the target range, headline inflation is still above 3.0%, and wages are still rising by around 4% year on year, the Bank judged that it was premature to begin monetary easing.

The BOC reiterated that it “remains prepared to raise the policy rate further if needed”. However, none of our panelists see further rate hikes, and many see rate cuts ensuing from Q2 2024. The Consensus is for the target for the overnight rate to end 2024 over 100 basis points below its current level, though the discrepancy in end-2024 forecasts is large at 200 basis points.

On the outlook, Goldman Sachs’ analysts said:

“We continue to expect that gradual inflation progress and firming activity will keep the BoC on hold until it initiates rate cuts, which we anticipate will start in 2024Q3.”

Desjardins’ Randall Bartlett was more dovish:

“The Canadian economy is clearly buckling under the ongoing strain of high interest rates, and the impact of past hikes has yet to be felt fully. Once the Bank of Canada is satisfied that the economy has slowed enough to support a gradual return of inflation to its 2% target, we expect it to begin cutting interest rates. This is anticipated starting at the April 2024 meeting.”

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