Bank of Canada holds at 5% again, sees inflation at 2% in 2025

On October 25, 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 second hold in a row.

Bank of Canada policy rate, %

What the Bank said

• Past rate increases are dampening activity. Demand for housing, durable goods and many services has softened.
• Population growth is easing labour pressures but adding to housing demand.
• CPI inflation was 2.8% in June, 4.0% in August and 3.8% in September. Rent and other housing costs remain high.
• The Bank expects inflation of about 3.5% through the middle of 2024 and a return to 2% in 2025.
• It is still prepared to raise the rate further if needed.

What it means for Calgary

Calgary’s market has been stronger than the national picture of softer housing demand, largely because of migration. Mortgage costs are not coming down yet. The next decision is on December 6, 2023.

Evidence that higher rates are working

The Bank said there is growing evidence that past rate increases are dampening economic activity and relieving price pressures. Consumption has been subdued, with softer demand for housing, durable goods and many services. Weaker demand and higher borrowing costs are weighing on business investment. Recent job gains have been below labour force growth and job vacancies have continued to ease, although the labour market is still on the tight side and wages are growing around 4% to 5%. Overall, the Bank said supply and demand in the economy are now approaching balance.

Population and housing

The Bank noted that the surge in Canada’s population is easing labour shortages in some sectors while adding to housing demand and consumption. It also pointed out that, besides elevated mortgage interest costs, inflation in rent and other housing costs remains high. Higher rates are moderating inflation in many goods bought on credit, and food inflation is easing from very high rates.

The new forecast

The October Monetary Policy Report projects Canadian growth of 1.2% this year, 0.9% in 2024 and 2.5% in 2025. Growth is expected to stay weak for the next year before picking up in late 2024 and through 2025, driven by household spending, exports and business investment. CPI inflation is expected to average about 3.5% through the middle of next year before easing to 2% in 2025. That is about the same timing as in July, but the near-term path is higher because of energy prices and persistent core inflation. Globally, the Bank expects growth of 2.9% this year and 2.3% in 2024.

Calgary compared with the national picture

The national story is softer housing demand. Calgary’s is different: CREB reported a record 2,441 sales in September, a benchmark price of $570,300, nearly 9% higher than a year earlier, and inventory more than 24% lower. CREB’s chief economist said strong interprovincial migration has kept demand high despite higher rates. One sign of change matches the Bank’s message, though: Calgary’s benchmark was flat in September after eight monthly gains.

Compared with September

In September, the Bank said the economy had entered a period of weaker growth. In October, it went further, saying monetary policy is clearly moderating spending. Yet it also said inflation risks have increased and progress towards price stability is slow. It wants to see downward momentum in core inflation before it is satisfied.