The Bank of Canada today maintained its target for the overnight rate at 4½%, with the Bank Rate at 4¾% and the deposit rate at 4½%. The Bank also continued its quantitative tightening policy.
Inflation in many countries is easing due to lower energy prices, normalized global supply chains and tighter monetary policy. At the same time, the labor market remains strong and measures of core inflation in many advanced economies suggest continued price pressures, particularly for services.
Global economic growth was stronger than expected. Growth in the United States and Europe has surprisingly picked up, but is expected to weaken as tighter monetary policy continues to weigh on those economies. In the United States, recent stress in the banking sector has further clouded the credit situation.
US growth is expected to slow significantly in the coming months, with particular weakness in sectors important to Canadian exports. Meanwhile, activity in the Chinese economy has recovered, particularly in services. Overall, commodity prices are close to January levels. The Bank's April Monetary Policy Report (MPR) projects global growth of 2.6% this year, 2.1% in 2024, and 2.8% in 2025.
In Canada, demand still exceeds supply and the labor market remains tight. Economic growth in the first quarter appeared stronger than projected in January, with a rebound in exports and strong consumption growth. Strong population growth adds to the labor supply and supports employment growth while boosting aggregate consumption. Housing market activity remains weak.
CPI inflation eased to 5.2% in February, and the Bank's preferred core inflation measure was just below 5%. The Bank expects CPI inflation to fall rapidly to around 3% in the middle of this year and then gradually decline to a target of 2% by the end of 2024.
The latest data reinforces the Governing Council's confidence that inflation will continue to decline in the future. However, to suppress inflation to the 2% level may prove more difficult as inflation expectations decline slowly.
Given the growth and inflation outlook, the Governing Council decided to maintain the policy rate at 4½%. Quantitative tightening continues to complement this restrictive stance. The Governing Council continues to assess whether monetary policy is restrictive enough to ease price pressures and remains ready to raise policy rates further if necessary in order to return inflation to the 2% target.
