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Canada Monetary Policy October 2023

Canada: Central Bank stays put in October

On 25 October, 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 the Bank’s view that “there is growing evidence that past interest rate increases are dampening economic activity and relieving price pressures.” Indeed, the economy is forecast to have broadly stagnated in Q3 and should record a similarly subdued performance in Q4, while core inflation fell back within the Bank’s 1.0%–3.0% target in September for the first time since June 2021. However, given that core inflation is still near the top of the target range, and that headline inflation is still above 3.0%, it was premature to begin monetary easing.

The BOC reiterated that it was willing to hike more if needed to tame inflation, and commented that inflationary risks had increased. However, the vast majority of our panelists don’t see rates increasing from current levels, and the Consensus is for the target for the overnight rate to end 2024 over 100 basis points below its current level.

On the outlook, Goldman Sachs’ analysts said: “ We viewed today’s message as dovish on net, and maintain our forecast that the BoC will hold the policy rate at 5% until its first cut in 2024Q3.” Desjardins’ Randall Bartlett was more dovish: “We think forecasters will be increasingly focused on when the Bank will cut interest rates. […] economists expect the Bank to cut by 25 basis points in the second quarter of 2024 on average. We agree with the timing, but our more bearish outlook—which includes a short, shallow recession in the first half of 2024—points of a more rapid pace of rate cuts once the Bank starts down that path.”

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