Bank of Canada ends 2023 holding at 5%

On December 6, 2023, the Bank of Canada held its target for the overnight rate at 5%, with the Bank Rate at 5.25% and the deposit rate at 5%. It was the third hold in a row and the last decision of 2023.

Bank of Canada policy rate, %

What the Bank said

• Growth stalled through the middle of 2023. Real GDP contracted at a rate of 1.1% in the third quarter, after 1.4% growth in the second.
• Consumption growth was close to zero for two quarters, and business investment has been flat.
• CPI inflation eased to 3.1% in October.
• Shelter inflation picked up, with faster growth in rent and other housing costs and elevated mortgage interest costs.
• The Bank is still prepared to raise rates if needed.

What it means for Calgary

Rates end 2023 at 5%, up from 4.25% at the end of 2022. Calgary’s market stayed strong anyway, thanks to migration. The first decision of 2024 is on January 24.

An economy no longer in excess demand

The Bank said higher interest rates are clearly restraining spending. Consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year. Exports and inventory adjustment subtracted from growth in the third quarter, while government spending and new home construction provided a boost. The labour market continues to ease: job creation is slower than labour force growth, job vacancies have declined further and the unemployment rate has risen modestly. Wages are still rising 4% to 5%. Overall, the Bank said, the economy is no longer in excess demand.

Shelter is now the main inflation problem

CPI inflation eased to 3.1% in October, helped by the drop in gasoline prices and by easing prices across a widening range of goods and services. But shelter price inflation picked up, reflecting faster growth in rent and other housing costs, along with elevated mortgage interest costs. The Bank’s preferred measures of core inflation have been around 3.5% to 4%, with October towards the lower end of that range.

Global and financial conditions

The global economy continues to slow. US growth has been stronger than expected but is likely to weaken. Euro area growth has weakened. Oil prices are about $10 per barrel lower than the Bank assumed in October. Long-term interest rates have unwound some of the sharp increases seen earlier in the autumn, and the US dollar has weakened against most currencies, including Canada’s. Lower long-term rates matter for fixed mortgage rates.

2023 in review

The Bank raised its rate from 4.25% to 4.5% in January, paused in the spring, then raised it to 4.75% in June and 5% in July. It held at 5% in September, October and December. Calgary’s market moved in the opposite direction from rates: CREB reported a total benchmark of $572,700 in November, nearly 11% higher than a year earlier, and record apartment sales for the year.

What the Bank wants to see

Governing Council is still concerned about risks to inflation and is prepared to raise rates further if needed. It wants to see further and sustained easing in core inflation, and it is watching the balance of demand and supply, inflation expectations, wage growth and corporate pricing.

The first decision of 2024 is on January 24, together with a new Monetary Policy Report with updated forecasts for growth and inflation.