Bank of Canada: Further rate hikes off the table

Wesley Blight

January 25, 2024

Key takeaways

  • The target overnight rate remains at 5% once again.
  • The Bank of Canada dropped reference to raising rates further if needed from its statement.
  • The stubbornness of core inflation remains a concern.

To kick off 2024, the Bank of Canada (BoC) decided to hold its target for the overnight rate at 5% for the fourth consecutive interest rate meeting. This move was widely anticipated by market participants. Quantitative tightening will also continue as is, where maturing Government of Canada bonds held by the BoC will not be replaced.

Notably, the Bank dropped its warning of the possibility of further interest rate increases from its January 2024 statement, further hinting that it’s near the end of its rate hiking cycle. In its place, the BoC closed it statement by saying “Governing Council 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.” 

Economic growth continues to slow and inflation continues to ease

Following global economic growth of 3% in 2023, the BoC now expects growth of 2.5% in 2024 and 2.75% in 2025. With this slowing of growth, inflation is also expected to soften and reach central bank targets in 2025.

From the Bank’s statement, “growth in the United States has been stronger than expected, it is anticipated to slow in 2024, with weakening consumer spending and business investment. In the Euro area, the economy looks to be in a mild contraction. In China, low consumer confidence and policy uncertainty will likely restrain activity.” 

More hints that the rate hike cycle is nearing its end

“In Canada, the economy has stalled since the middle of 2023 and growth will likely remain close to zero through the first quarter of 2024. Consumers have pulled back their spending in response to higher prices and interest rates, and business investment has contracted,” said the Bank.

From its January 2024 Monetary Policy Report, the BoC projects that the Canadian economy will grow by 0.8% in 2024 and 2.4% in 2025. It expects inflation to hover around 3% before easing and returning to its 2% target in 2025. 

Progressing from the Bank’s previous interest rate meetings, the BoC noted that supply had caught up with demand in the economy. It went as far as to suggest the economy is operating in modest excess supply. Previously, it had said that the Canadian economy was no longer in excess demand, and before that, the economy was approaching balance. 

Scotia Global Asset Management’s Multi-Asset Management Team remains tactically cautious at this time

While some aggressive estimates have the BoC cutting rates up to six times in 2024 and markets are still content with a soft-landing scenario (where the economy transitions from growth to slow- or no-growth, avoiding a recession), we continue to exercise caution.

The cumulative impact of higher rates is still very much playing out and is a negative to risk-on assets like equities. We remain underweight equities in our portfolios that include a tactical asset allocation overlay.

In the fixed income portion of our portfolios, we’ve taken the opportunity to benefit from a decrease in bond yields in anticipation of the BoC cutting rates. Evidence and the shift in the BoC’s language, suggests the level of policy restriction today is likely no longer required in the near future.

Our bear market signals continue to flag red, indicating an increased risk of recession, justifying our tactical underweight to equities overall.

You can read more about our short- and long-term outlooks and how we position portfolios here.

The BoC’s next interest rate announcement is scheduled for March 6th.  

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.