Economists expected it, so there was no surprise today (Wed) when the Bank of Canada announced keeping its key interest rate at five per cent. Governor Tim Macklem said, “Inflation is coming down as higher interest rates restrain demand in the economy, but inflation is still too high and underlying inflationary pressures persist. We need to give these higher interest rates time to do their work.” He added that the discussion now shifts from whether the policy rate is restrictive enough to restore price stability to how long it needs to stay at the current level.

Macklem noted that supply has caught up with demand in Canada and the economy now looks to be in modest excess supply. Labour markets have eased, with job vacancies returning to near pre-pandemic levels. New jobs are being created at a slower rate than population growth, however wages are still rising around 4 to 5 per cent.

The forecast for the first quarter of the year is for close to zero growth in the economy in Canada but then a gradual strengthening around the middle of 2024. The Bank of Canada expects household spending will then likely pick up and exports and business investment should get a boost from recovering foreign demand.