In its final decision of the year, the Bank of Canada chose to maintain its key interest rate at five percent, marking the third consecutive hold. The central bank justified its decision by citing evidence that the recent higher rates have been effective in curbing inflation. The statement highlighted the impact of higher interest rates on spending, noting that consumption growth has been close to zero, and business investment has remained essentially flat over the past year. The central bank acknowledged a cooling job market and weaker growth, indicating that demand is no longer outpacing supply in the economy.
The central bank emphasized the necessity of this economic slowdown to restore price stability. While the decision to maintain the current rate was anticipated, speculation arises about potential rate cuts in 2024. The Bank of Canada, however, is not providing clear indications of when such cuts might occur and keeps the possibility of additional rate hikes open. Some analysts argue that the central bank will likely shift to cutting interest rates as the unemployment rate continues to rise and economic spending faces challenges. Despite market expectations of rate cuts in the first quarter of the next year, some commercial banks, like RBC, are more cautious, forecasting potential rate cuts in the second half of 2024.
As inflation has eased to 3.1 percent in October, the central bank is awaiting more evidence that underlying price pressures are indeed easing. With the Canadian economy grappling with higher borrowing costs, GDP contraction, and a slowing labor market, the central bank's decision on future rate adjustments will depend on how the economy evolves in the coming months. The next rate decision, along with updated economic forecasts, is scheduled for January 24, 2024. Economists suggest that the Canadian economy is still adjusting to the significant rate hikes of the past two years, anticipating a sluggish growth of 0.5 percent in the next year.
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