The Bank of Canada has maintained its overnight interest rate at five percent, citing several factors impacting the Canadian economy (Gowling, 2023). These include the effects of recent interest rate hikes, which have subdued economic growth, resulting in an average growth rate of just one percent this year. While there is an anticipation of a weak economy in 2024, there is hope for a pickup to 2.5 percent growth by 2025. Inflation, which reached 3.8 percent in September (down from four percent in August), is expected to remain at 3.5 percent until the middle of the following year, gradually returning to the target rate of two percent by 2025.
The Bank of Canada remains vigilant about the potential need for further interest rate hikes if underlying inflation measures show an increase, reflecting their readiness to act if inflationary pressures endure. High housing costs, particularly rental and mortgage expenses, continue contributing to inflationary pressures in the Canadian economy. The central bank is particularly concerned that the economy may slow down more rapidly than anticipated, and the tightening of monetary policy could potentially trigger market volatility, which might have adverse effects on global economic growth.
The Bank of Canada has revised its growth forecast for 2023, lowering it to 1.2%, a significant adjustment from the earlier prediction of 1.8% made in July (Ljunggren, 2023). To combat inflation, the central bank increased interest rates ten times between March 2022 and July 2023 to restore balance between supply and demand. Inflation is expected to persist around 3.5% until mid-2024. It is currently uncertain when and at what rate inflation will decline. Notably, energy prices no longer act as a factor pulling inflation down, while shelter costs continue to rise.
The central bank has chosen to maintain its rates at the 22-year high of 5%. In Q2 2023, economic activity stalled due to wildfires and a public sector strike. Additionally, the bank has revised its growth projections for 2024. They now anticipate a growth rate of 0.9%, which is lower than the initial estimate of 1.2% made in July. Projections for the third and fourth quarters of 2023 have also been revised downwards.
British Columbia is grappling with a projected fiscal year deficit of $6.7 billion, a substantial increase driven by wildfire-related expenditures and a dip in natural gas prices (Chiang, 2023). Notably, the province spent $762 million more than initially budgeted to combat the record-breaking wildfire season in 2023. Additionally, the deficit widened due to lower natural gas royalties, which fell $1.2 billion below budget projections. Originally anticipating $2 billion in natural gas royalties for the year, British Columbia now expects only $837 million in revenue from this source.
Finance Minister Katrine Conroy has highlighted the province's commitment to maintaining government spending without resorting to service cuts, new fees, or tax hikes. This is considered vital for supporting economic growth, despite the substantial deficit. The provincial economy has exhibited resilience by exceeding expectations, with projected economic growth for the year at 1.2%, surpassing the initial estimate of 0.4%. However, there are ongoing concerns related to high-interest rates, weakened global demand for exports, and sustained inflationary pressures, all of which are expected to affect economic growth in the foreseeable future.
Financial Tip of the Month:
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Chiang, Chuck. (2023). B.C.'s projected deficit grows to $6.7 billion for 2023-2024 fiscal year. CTV News, 27 Sept. 2023, https://bc.ctvnews.ca/b-c-s-projected-deficit-grows-to-6-7-billion-for-2023-2024-fiscal-year-1.6580254.
Gowling, Jordan. (2023). Bank of Canada holds its key interest rate at 5 per cent, as Canadian economy slows. CTV News, 25 Oct. 2023, https://www.ctvnews.ca/business/bank-of-canada-holds-its-key-interest-rate-at-5-per-cent-as-canadian-economy-slows-1.6615933.
Ljunggren, David. (2023). Bank of Canada cut 2023 growth forecast, sees persistently high inflation. Yahoo Finance, 25 Oct. 2023, https://ca.finance.yahoo.com/news/bank-canada-cut-2023-growth-140259229.html.