As had been widely anticipated, the Bank of Canada held its benchmark overnight rate at 5 percent this morning, but language in the accompanying statement tilted in a modestly-dovish direction, helping ratify market expectations for rate cuts in early 2024. 

Officials acknowledged signs of weakness in the economy, saying “Higher interest rates are clearly restraining spending: consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year”. Government spending and new home construction were highlighted as helping cushion downside risks, but labour markets were seen softening, with job creation failing to keep pace with population growth, vacancies declining, and the unemployment rate beginning to rise. Echoing earlier guidance from Governor Macklem, the statement said “these data and indicators for the fourth quarter suggest the economy is no longer in excess demand”.

Relatively short shrift was given to price risks, with a slowdown in the economy “reducing inflationary pressures in a broadening range of goods and services prices”. Officials noted a pick-up in shelter price inflation, but this was seen as “reflecting faster growth in rent and other housing costs along with the continued contribution from elevated mortgage interest costs” (which are themselves driven by central bank policy in Canada and the US). A sentence which previously noted a rise in inflationary risks was removed. 

Boilerplate language was used to keep additional rate hikes on the table: “Governing Council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed”. 

The Canadian dollar is essentially flat relative to pre-statement levels, with rate differentials holding stable relative to the US.

Looking ahead to the new year, we suspect markets will keep betting on a convergent policy path between both North American central banks – which should keep the loonie supported – until new data shows the Canadian economy taking a harder hit than its bigger cousin to the south. At the risk of becoming the proverbial “boy who cried wolf,” we remain convinced that vastly higher debt burdens in Canada’s household and corporate sectors will ultimately impact the country’s growth trajectory more profoundly.