Overnight Rate Remains at 5.0%

Amid signs of slowing economic activity, easing inflation and the unemployment rate ticking higher, the Bank of Canada (BoC) kept the Overnight Target Rate on hold at 5.0% today for a third consecutive meeting (22-year high), as widely anticipated. Interestingly, the post-rate statement erased October’s language regarding increasing inflationary risks, though it retained the note that it remains ready to act ‘if needed’.

The release also commented that the Governing Council remains concerned regarding the risks to the outlook for inflation—consumer price inflation rose to 3.1% in the twelve months to October 2023, down from 3.8% the month prior.  At this point, however, it is obvious that although most would agree that the chances of another hike from the BoC are minimal, the central bank is unlikely to pencil over this ‘prepared to increase rates if needed’ sentence until rate cuts begin at risk of reigniting inflationary pressures.

The post-rate statement further added that the Governing Council ‘wants to see further and sustained easing in core inflation, and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour’.

The central bank has raised the Overnight Target Rate by 475 basis points since early 2022 and will not make another appearance until late January next year. Money markets have priced in a peak and around 100 basis points of cuts for 2024, expected to begin in early Q2.

Policy Language Change

Notable changes to today’s policy statement:

October’s policy statement:

With clearer signs that monetary policy is moderating spending and relieving price pressures, Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet. However, Governing Council is concerned that progress towards price stability is slow and inflationary risks have increased, and is prepared to raise the policy rate further if needed. Governing Council wants to see downward momentum in core inflation, and continues to be focused on the balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behaviour. The Bank remains resolute in its commitment to restoring price stability for Canadians.

December’s policy statement:

With [Added] further signs that monetary policy is moderating spending and relieving price pressures, Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet. [Removed However] Governing Council is [Added] still concerned [Added] about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed. Governing Council wants to see [Added] further and sustained easing in core inflation, and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour. The Bank remains resolute in its commitment to restoring price stability for Canadians.

Despite an immediate, albeit brief, spike lower in the USD/CAD exchange rate, the currency pair largely overlooked the release and is poised to end the day off worst levels.

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