Mortgage Logic

BoC Takes Heed of US Bank Failures, Holds Rate

The Bank of Canada (BoC) today held its target for the overnight rate at 4½%, with the Bank Rate at 4¾% and the deposit rate at 4½%. The Bank is also continuing its policy of quantitative tightening, ie releasing/selling debt that they had previously purchased.

Per the BoC:   “Inflation in many countries is easing in the face of lower energy prices, normalizing global supply chains, and tighter monetary policy. At the same time, labour markets remain tight and measures of core inflation in many advanced economies suggest persistent price pressures, especially for services.

Global economic growth has been stronger than anticipated. Growth in the United States and Europe has surprised on the upside but is expected to weaken as tighter monetary policy continues to feed through those economies. In the United States, recent stress in the banking sector has tightened credit conditions further. US growth is expected to slow considerably in the coming months, with particular weakness in sectors that are important for Canadian exports. Meanwhile, activity in China’s economy has rebounded, particularly in services.”

  • In Canada, demand is still exceeding supply and the labour market remains tight. (inflationary)
  • The BoC’s Business Outlook Survey suggests acute labour shortages are starting to ease… (deflationary)
  • As more households renew their mortgages at higher rates and restrictive monetary policy works its way through the economy more broadly (deflationary)
  • Consumption is expected to moderate this year. Softening foreign demand is expected to restrain exports and business investment. (deflationary)

BoC’s projections: CPI inflation eased to 5.2% in February, and the Bank’s preferred measures of core inflation were just under 5%. The Bank expects CPI inflation to fall quickly to around 3% in the middle of this year and then decline more gradually to the 2% target by the end of 2024.

In summary: The BoC is taking seriously the bank failures in the US and has decided that raising rates further in Canada is too risky right now and that a wait-and-see approach is called for to observe the full impact of all of their rate hikes over the past year.