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Essentials of Monetary Policy

New Year, New Dovish Tone from the Bank of Canada

January 24, 2024
Randall Bartlett
Senior Director of Canadian Economics

According to the BoC

As was widely expected, the Bank of Canada held the overnight policy rate at 5.00% today. The last time the Bank hiked rates was at the July announcement.

Most importantly, the Bank waxed more dovish in the press release than it has for some time. Having included a hiking bias in the text since early 2022, it has now been removed. In December, the Governing Council indicated that it “remains prepared to raise the policy rate as needed.” While the BoC continues to express concern around risks to the inflation outlook, those concerns came without an explicit hiking bias in the press release. That said, in the Press Conference Opening Statement that accompanied the Monetary Policy Report (MPR), Governor Tiff Macklem made clear that “doesn’t mean we have ruled out further policy rate increases.”

In support of this change of tack, the Bank revised down its outlook for real GDP growth across the board. According to the Bank, “the economy has stalled since the middle of 2023 and growth will likely remain close to zero through the first quarter of 2024.” The Bank’s pessimism is reflected in a downward revision to annualized growth in the second half of 2023, to about -0.2% from 0.6% annualized in the October MPR. This provides a weak hand off to 2024. The BoC is also expecting a soft start to this year, with real GDP projected to advance by just 0.5% annualized in the first quarter. As a result, the 2024 real GDP growth forecast has been marked down a tick to 0.8% from 0.9% (graph 1). The 2025 forecast was also revised lower by a tick to 2.4% from 2.5% in the previous MPR. While this led to a further downward revision to the Bank’s output gap estimate, the BoC continues to believe the Canadian economy will avoid a “deep” recession. 

In part reflecting this weaker economic outlook in the January 2024 MPR, the Bank marked down slightly its forecast for CPI inflation in 2024. It is now expected to be 2.8% this year, down from a projected 3.0% at the time of the October MPR. This partly reflects headline CPI inflation coming in just below the Bank’s prior forecast for Q4 2023 (3.3% y/y versus 3.4%, respectively). The BoC now anticipates that inflation in the first quarter of 2024 will cool further, albeit it modestly, to 3.2%. However, the 2025 outlook for inflation was left unchanged at 2.2%, with the expectation that it will return to the 2% target in 2025. The Bank was also clear in the MPR that shelter inflation is a key driver of headline inflation over the outlook, while linking the surge in population growth to the acceleration in rent inflation. Wage growth also remains elevated despite signs that the labour market is cooling. 


While today’s interest rate decision didn’t come as a surprise, there was plenty to chew on. Dropping the explicit bias toward rate hikes in the press release combined with another round of downgrades to the real GDP growth and inflation projections gives us further confidence that rate hikes are in the rearview mirror. The quantitative tightening program operating in the background is also working to tighten financial conditions even in the absence of rate hikes.

We expect the Bank of Canada to further dial down its hawkish signaling, and remain of the view that the Bank will begin cutting rates this spring. Indeed, we think the Bank’s outlook is still too optimistic (graph 2). As we reiterated in our most recent Economic and Financial Outlook External link. This link will open in a new window., we expect a short and shallow recession in Canada starting in the first half of 2024. Sustained mortgage renewals at higher interest rates, slower population growth, and CEBA loan repayments will all apply further downward pressure to an already lacklustre outlook.