The Bank of Canada (BOC) decided to maintain its overnight rate at 5% on Wednesday, in light of a slowing economy and the need to moderate spending and price pressures through monetary policy. This decision led to a surge in the US dollar, which rose above 1.3800 against the Canadian dollar, marking its highest level since the US banking concerns in March.
The BOC's decision came amidst a volatile global market, characterized by a 1.4% fall in the Nasdaq and soft Google (NASDAQ:GOOGL) earnings. However, a robust US new home sales report coincided with the BOC's decision, bolstering both the US dollar and Treasury yields. The USD/CAD pair saw an increase of about 35 pips following this announcement.
Despite holding rates, the BOC signaled a potential deviation from future rate hikes due to stubbornly high core inflation. The bank maintains its hawkish bias, ready for further hikes if necessary. Current inflation dropped to 3.8% in September from 4% in August and is projected to remain at 3.5% until mid-2023.
According to the BOC, economic growth averaged 1% this year, with weak prospects anticipated until 2024 before a potential rise to 2.5% in 2025. The bank expects inflation to reach its 2% target rate by the end of 2025 and projects nearly 0.9% economic growth in 2024.
The bank also expressed concerns about slow progress towards its inflation target, potential oil price surges due to the Israel-Gaza conflict, and high domestic inflation expectations. Risks include businesses' slow pricing adjustments and possible increased cost pressures if labor market conditions remain tight or productivity growth is weak.
High shelter costs are inflating the Canadian economy, with households paying more for rental and mortgage costs. Delinquency rates on mortgages remain low, but there's an increase in borrowers falling behind on payments by 60 days in other credit products, notably motor vehicle loans, which have surpassed pre-pandemic levels.
The BOC warned about the potential impacts of monetary policy tightening, including triggering market volatility, sharp slowdowns in global growth, and negatively impacting equity and other asset prices if bond yields continue to rise. The next policy rate announcement is expected on Jan. 24, 2024.
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