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Bank of Canada Holds Overnight Rate at 5%



In a highly anticipated decision today, the Bank of Canada (BoC) has opted to keep its overnight rate at 5%.


It is crucial to distinguish between the "overnight rate" and the "prime rate." The former represents the Bank of Canada's designated target rate, serving as the cost of borrowing. Essentially, for the sake of discussion, the overnight rate can be viewed as the rate at which banks borrow money. On the other hand, the "prime rate" is determined by financial institutions themselves and is the rate linked to mortgages and lines of credit. Typically, when the overnight rate experiences a change, the prime rate follows suit. Presently, the prime rate stands at 7.2%, and it will remain unchanged as a result of today's announcement.


In previous meetings, the BoC has been steadily and carefully shifting towards a more dovish position. The mention of the necessity to raise rates further has already been dampened, with the central bank continuing to emphasize the weakening of overall demand while restating the potential for inflation pressures despite a decrease.


According to recent economic data, the Canadian economy has shown signs of decline since the previous monetary policy meeting in January. While gross domestic product increased by 1% in the fourth quarter of 2023, it was still below the projected growth by the BoC. The majority of this growth was driven by net exports, while spending and investment by domestic consumers and businesses remained subdued. Furthermore, per capita GDP growth was slower for the sixth consecutive quarter due to population growth outpacing output.



Economic Pulse Check: Examining GDP Growth and Labour Market Trends


On Friday, we are expecting the release of February's labour market data, which is expected to show an increase in employment. However, this increase will not be sufficient to prevent the unemployment rate from rising to 5.9%, as the number of workers seeking employment continues to outpace available job opportunities. January's labour market figures were stronger than anticipated, with wage growth remaining high. Despite this, the decreasing number of job openings continues to indicate a slowdown in labour demand. According to Statistics Canada, estimates of wage growth based on business payrolls have also decreased significantly. The positive aspect of the overall economic softening is that inflationary pressures are likely to continue to decrease rather than pick up again. Our main prediction is that the BoC will lower the overnight rate in June after further data confirms a decrease in inflation towards their target.


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