The Bank of Canada has maintained its key interest rate at 5%, marking the fourth consecutive hold, and signaled a significant shift in its monetary policy stance, moving away from the likelihood of further rate hikes. This decision reflects the central bank’s assessment of the Canadian economy’s transition into a phase of “excess supply,” which is anticipated to contribute to a gradual reduction in inflation over time.
Governor Tiff Macklem highlighted that the focus of monetary policy discussions has evolved from determining if the current policy rate is sufficiently restrictive to stabilize prices, to deliberating on the duration for which the rate should remain at its current level. Although further rate increases have not been entirely ruled out, they appear unlikely unless economic activities and inflation deviate significantly from the bank’s projections.
Economic growth in Canada has decelerated, with the economy barely avoiding a recession despite predictions to the contrary last year. Growth is expected to remain sluggish, with the Bank of Canada projecting a modest GDP growth of 0.8% for 2024, improving to 2.4% in 2025. Inflation, which has seen a significant decline from its mid-2022 peak, is expected to stabilize around the bank’s 2% target by 2025, although the path there might be slow and uneven, particularly due to concerns around shelter inflation.
The real estate market remains a critical factor, with mortgage interest costs surging and rents increasing rapidly. Despite these challenges, there is a cautious optimism that the housing market might see increased activity and a potential price rebound, especially as the central bank’s stance reduces the likelihood of further rate hikes, encouraging buyers to enter the market.
This pivotal shift in the Bank of Canada’s approach reflects a broader trend among central banks globally, as they navigate the delicate balance between controlling inflation and fostering economic growth amid uncertain global economic conditions.
