Bank of Canada: Holds policy interest rate at 5.0%, continues to warn of possible hikes

Wesley Blight

December 11, 2023

Key takeaways

  • The Bank of Canada once again decided to hold its target overnight rate at 5.0%.
  • Evidence suggests that monetary policy is relieving price pressures.
  • The Bank remains concerned about inflation and is prepared to increase rates further if needed.

The Bank of Canada (BoC) once again left its target for the overnight rate at 5.0% after moving to this level at its July meeting. While the BoC continues to see signs that “monetary policy is moderating spending and relieving price pressures,” it continues to warn about the possibility of further rate hikes as it remains concerned about inflation. Quantitative tightening will also continue as is, where maturing Government of Canada bonds held by the BoC will not be replaced.

Tighter policy continues to work its way through the global economy

Global growth continues to slow and inflation has eased further. In Canada, growth shrank by 1.1% in the third quarter following growth of 1.4% in the second quarter. Canadian CPI inflation also slowed to 3.1% in October.

“Higher interest rates are clearly restraining spending: consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year. Exports and inventory adjustment subtracted from GDP growth in the third quarter, while government spending and new home construction provided a boost,” said the Bank in its December statement. 

Data suggests the economy is no longer in excess demand

As everyone is watching for a shift in the BoC’s tone and stance, looking for hints that would suggest policy tightening is nearing its end, the Bank’s statement about the economy no longer being in excess demand is notable. Previously, it had said the Canadian economy was “approaching balance.”

However, the Bank did not drop its warning of further rate hikes. It reiterated that it “is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed.” Furthermore, that it “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.”

Scotia Global Asset Management’s Multi-Asset Management Team maintains its bias to fixed income

As the lagged impact of tighter conditions continues to materialize and is a negative to risk-on assets like equities, we remain underweight equities in portfolios that include a tactical asset allocation overlay.

Regarding fixed income, there is an opportunity to benefit from a decrease in bond yields in anticipation of the BoC cutting rates down the road. We have seen this start to play out over the past month despite the Bank’s rhetoric about being ready to hike if needed. Evidence and the shift in the BoC’s language, confirms growth is slowing in Canada, which suggests the level of policy restriction today is likely no longer required in the future.

Equity markets continue to be content with a soft-landing scenario (where the economy transitions from growth to slow- or no-growth, avoiding a recession). However, many bear market signals continue to flag red, and in many cases, grow more pronounced, indicating an increased risk of recession, justifying our overall portfolio positioning.

The BoC’s first interest rate announcement in 2024 is scheduled for January 24th and will be accompanied by the latest Monetary Policy Report. 

Wesley Blight

Wesley Blight, CFA, CIM, FCSI, is a Portfolio Manager with the Multi-Asset Management Team of Scotia Global Asset Management. He is responsible for private asset and multi-asset portfolio solutions.