The Bank of Canada announced today that its key overnight interest rate will remain at 5%. This means the prime lending rate will remain at 7.2% for the fourth time in a row.
Let’s talk about inflation
In Canada, CPI inflation ended the year at 3.4%. Shelter costs remain the most significant contributor to above-target inflation.
Economic activity has reached a standstill since mid-2023, and it’s anticipated that growth will hover around zero throughout the first quarter of 2024. Consumers have reduced their spending due to increased prices and interest rates, resulting in declining business. The slow-paced economic growth has created a balance between supply and demand, indicating modest excess supply. Labour market conditions have eased as job vacancies have returned to similar levels before the pandemic. Despite a slower rate of job creation compared to population growth, wages continue to rise.
What is expected next
The Bank of Canada expects inflation to remain close to 3% during the first half of this year before gradually easing, returning to the 2% target in 2025. Economic growth is expected to strengthen gradually around the middle of 2024.
Tiff Macklem, the central bank governor, stated that conversations at the Bank of Canada are shifting from whether its policy-setting interest rate is high enough to how long the bank’s “current restrictive stance” needs to be in place. He also discussed the bank not ruling out further rate increases if inflation rises. But also mentioned the economy “evolves broadly in line” with their current projections, so he does not expect an interest rate hike to be discussed.
What does this mean for Canadians?
The Bank of Canada’s rate decision influences the cost of debt for Canadians taking out variable-rate loans and mortgages. It can also affect the interest rates on some savings accounts. Feel free to reach out if you’d like to talk about your variable rate mortgage, and together, we can explore the best course of action for you.
The next scheduled date for announcing the overnight rate target is March 6, 2024. For more information, check out the Bank of Canada’s January 24, 2024 rate announcement>>
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