MonetaryPolicy

Report

October2023

Canada’sinflation-controlstrategy

Inflationtargetingandtheeconomy

TheobjectiveofCanada’smonetarypolicyistopromotetheeconomicandfinancialwell-beingofCanadians.Canada’sexperiencewithinflationtargetingsince1991hasshownthatthebestwaythatmonetarypolicycanachievethisgoalisbymaintainingalowandstableinflationenvironment.Doingsofostersconfidenceinthevalueofmoneyandcontributestosustainedeconomicgrowth,astrongandinclusivelabourmarketandimprovedlivingstandards.

In2021,theGovernmentofCanadaandtheBankofCanadarenewedtheflexibleinflation-targetingstrategyofthemonetarypolicyframeworkforafurtherfive-yearperiod,endingDecember31,2026.1

Theinflationtargetwasrenewedatthe2%midpointofthe1%–3%controlrange,withinflationmeasuredasthe12-monthrateofchangeintheconsumerpriceindex(CPI).

TheGovernmentandtheBankagreedthatthebestcontributionmonetarypolicycanmaketotheeconomicandfinancial

well-beingofCanadiansistocontinuetofocusonpricestability.TheGovernmentandtheBankalsoagreedthatmonetarypolicyshouldcontinuetosupportmaximumsustainableemployment,recognizingthatmaximumsustainableemploymentisnotdirectlymeasurableandisdeterminedlargelybynon-monetaryfactorsthatcanchangethroughtime.

Further,theGovernmentandtheBankagreedthatbecausewell-anchoredinflationexpectationsarecriticaltoachievingbothpricestabilityandmaximumsustainableemployment,theprimaryobjectiveofmonetarypolicyistomaintainlow,stableinflationovertime.

Inflationtargetingissymmetricandflexible

Canada’sinflation-targetingapproachissymmetric,whichmeanstheBankisequallyconcernedaboutinflationrisingaboveorfallingbelowthe2%target.

Canada’sinflation-targetingapproachisalso?exible.Typically,theBankseekstoreturninflationtotargetoverahorizonofsixto

eightquarters.However,themostappropriatehorizonforreturninginflationtotargetwillvarydependingonthenatureandpersistenceoftheshocksbuffetingtheeconomy.

The2021agreementwiththeGovernmentspecifiesthatthe2%inflationtargetremainsthecornerstoneoftheframework.

TheagreementfurthernotesthattheBankwillcontinuetousetheflexibilityofthe1%–3%controlrangetoactivelyseekthemaximumsustainablelevelofemployment,whenconditionswarrant.TheBankwillalsocontinuetoleveragetheflexibilityinherentintheframeworktohelpaddressthechallengesofstructurallylowinterestratesbyusingabroadsetofpolicytools.TheBankwillusethisflexibilityonlytoanextentthatisconsistentwithkeepingmedium-terminflationexpectationswellanchoredat2%.

Monetarypolicytools

Becausemonetarypolicyactionstaketimetoworktheirwaythroughtheeconomyandhavetheirfulleffectoninflation,monetarypolicymustbeforward-looking.

TheBanknormallycarriesoutmonetarypolicythroughchangesinthetargetfortheovernightrateofinterest(thepolicyrate).The

Bankalsohasarangeofmonetarypolicytoolsitcanusewhenthepolicyrateisatverylowlevels.Thesetoolsconsistofguidanceonthefutureevolutionofthepolicyrate,large-scaleassetpurchases(quantitativeeasingandcrediteasing),fundingforcreditmeasures,andnegativepolicyrates.Thepotentialuseandsequencingofthesetoolswoulddependontheeconomicandfinancialmarketcontext.

AlloftheBank’smonetarypolicytoolsaffecttotaldemandforCanadiangoodsandservicesthroughtheirinfluenceonmarketinterestrates,domesticassetpricesandtheexchangerate.Thebalancebetweenthisdemandandtheeconomy’sproductioncapacityis,overtime,themainfactorthatdeterminesinflationpressuresintheeconomy.

Communications

Consistentwithitscommitmenttoclear,transparentcommunications,theBankregularlyreportsitsperspectivesontheeconomyandinflation.Policydecisionsaretypicallyannouncedoneightpre-setdaysduringtheyear,andfullupdatestotheBank’soutlookarepublishedfourtimeseachyearintheMonetaryPolicyReport.

TheBankiscommittedtoexplainingwhenitisusingtheflexibilityoftheinflation-targetingstrategy.

Giventheuncertaintyaboutthemaximumsustainablelevelofemployment,theBankwillconsiderabroadrangeoflabourmarketindicators.TheBankwillalsosystematicallyreporttoCanadiansonhowlabourmarketoutcomeshavefactoredintoitspolicydecisions.

Monitoringinflation

Intheshortrun,thepricesofcertainCPIcomponentscanbeparticularlyvolatileandcancausesizablefluctuationsinCPIinflation.

Insettingmonetarypolicy,theBankseekstolookthroughsuchtransitorymovementsinCPIinflationandfocuseson“core”inflationmeasuresthatbetterreflecttheunderlyingtrendofinflation.Inthissense,thesemeasuresactasanoperationalguidetohelptheBankachievetheCPIinflationtarget.TheyarenotareplacementforCPIinflation.

TheBank’stwopreferredmeasuresofcoreinflationareCPI-trim,whichexcludesCPIcomponentswhoseratesofchangeinagivenmontharethemostextreme,andCPI-median,whichcorrespondstothepricechangelocatedatthe50thpercentile(intermsofbasketweight)ofthedistributionofpricechanges.

1

Formoredetails,seeJointStatementoftheGovernmentofCanadaandtheBankofCanadaontheRenewaloftheMonetaryPolicyFramework

(December13,2021)

;MonetaryPolicyFrameworkRenewal—December

2021;andT.Macklem,“OurMonetaryPolicyFramework:Continuity,ClarityandCommitment”(speechtotheEmpireClubofCanada,Toronto,

December15,2021).

TheMonetaryPolicyReportisavailableontheBankofCanada’swebsiteat

bankofcanada.ca.

Forfurtherinformation,contact:

PublicInformationCommunicationsDepartmentBankofCanada

234WellingtonStreetOttawa,OntarioK1A0G9

Telephone:613-782-8111;

1-800-303-1282(toll-freeinNorthAmerica)

Email:

info@bankofcanada.ca

Website:

bankofcanada.ca

ISSN1201-8783(Print)

ISSN1490-1234(Online)

?BankofCanada2023

MonetaryPolicyReport

October2023

ThisisareportoftheGoverningCounciloftheBankofCanada:

TiffMacklem,CarolynRogers,ToniGravelle,SharonKozicki,RhysMendesandNicolasVincent

Contents

Overview 1

Globaleconomy 2

Box1:ChangestotheeconomicprojectionsincetheJulyReport 3

Slowinginflation 3

Box2:Differencesinshelterpriceinflationacross

advancedeconomies 5

Tighterfinancialconditions 6

ResilientUSdemand,sluggishnessinChina 7

Higheroilprices 7

Box3:Keyinputstotheprojection 8

Canadianeconomy 9

Pastinterestrateincreasesslowingdemand 9

Box4:Chartingmonetarypolicy’simpactontheeconomy

andinflation 9

Rebalancingofsupplyanddemand 12

Persistentinflationarypressures 13

Inflationexpectations,corporatepricingbehaviourandwage

growthyettonormalize 16

Slowdemandgrowthandrisingsupply 18

Mutedhouseholdspendinggrowth 19

Softbusinessinvestmentandexportgrowth 20

Inflationhighinthenearterm,easingin2025 20

Riskstotheinflationoutlook 22

Mainupsiderisks 22

Maindownsiderisks 22

Overview

Inflationcontinuestodeclinegraduallyinmosteconomies.Higherpolicyinterestratesandtightfinancialconditionsarecontributingtoslowingglobaldemandgrowthandeasingpricepressures,althoughinflationinservicespricesissticky.

Globaleconomicgrowthisslowing.WhiletheUSeconomyhasbeensurprisinglyrobust,theweaknessinChinahasbeenmorepronouncedthanexpectedintheJulyReport.

InCanada,higherinterestratesareworkingtoeasepricepressures,andconsumerpriceindex(CPI)inflationhascomedownsignificantlyfromitspeakinJune2022.However,progresstowardthe2%targetisprovingtobeslow,andthepaceoffuturedeclinesininflationremainsuncertain.Coreinflationhasbeenmorepersistentthanexpected.

Atthesametime,demandgrowthhaseasedandsupplyisrising.Evidencesuggeststhattheeconomyisapproachingbalance.Withsupplygrowingfasterthandemand,pricepressuresareexpectedtograduallymoderatefurther.

Economicactivityisforecasttobemodestthroughmostof2024,withannualgrowthingrossdomesticproduct(GDP)justunder1%.Aspastinterestrateincreasescontinuetoworktheirwaythroughtheeconomy,theywillweighonhouseholdspendingandbusinessinvestment.Weakforeigndemandis

alsoexpectedtoslowexportgrowth.GDPgrowthisprojectedtorisetoabout2?%in2025.

Inflationisnowprojectedtostayaround3?%untilthemiddleof2024.Astheeconomymovesintoexcesssupplyandpricepressuresmoderate,inflationisforecasttoeasetoabout2?%inthesecondhalfof2024andthenreturntotargetin2025.

Aconsiderableamountofuncertaintysurroundstheforecast.Three-monthratesofcoreinflationhaveremainedelevated,intherangeof3?%to4%forthepastyear.Near-terminflationexpectationsarestillhigh,andthereisariskthattheycouldbecomeadriverofwage-andprice-settingbehaviour.AnotherriskisthatthewarinIsraelandGazaspreadsfurtherintoabroaderregionalconflict,disruptingoilsuppliesandleadingtoaresurgenceofinflationinenergyprices.

Overall,thereismoreevidencethattheeconomyisslowing,whichisrelievingpricepressures.Buttheprogresstopricestabilityisslow,andinflationaryriskshaveincreased.

Globaleconomy

Inflationiseasingacrossmosteconomies.Initially,thislargelyreflectedfallingenergyprices.Morerecently,thedeclineininflationinadvancedeconomieshasbeenledbyslowergrowthinthepricesofnon-energygoodsandshelter.Inflationinthepricesofservicesremainselevatedandistakinglongertoadjust.Inflationisanticipatedtocontinueitsgradualdeclineashigherpolicyinterestratesandtherecentincreasesinyieldsonlong-termbondsslowdemand.However,higheroilpricesareslowingthedisinflationaryprocessandincreasingupsiderisks.Inflationinmostmajoradvancedeconomiesisnowexpectedtoreturntocentralbanktargetsin2025,althoughthetimingremainsuncertain.

AsprojectedintheJulyReport,globalgrowthhasbeenslowingandisforecasttoeasefurther.Thecompositionofglobalgrowth,however,hasshifted

(Table1andBox1).1For2023,economicgrowthintheUnitedStates—Canada’slargesttradingpartner—isnowexpectedtobestrongerthanpreviouslyanticipated,whilegrowthforChinahasbeenreviseddown.

Table1:Projectionforglobaleconomicgrowth

ShareofrealglobalGDP*(%)

Projectedgrowth?(%)

2022

2023

2024

2025

UnitedStates

16

1.9(2.1)

2.2(1.8)

0.8(0.6)

1.2(1.4)

Euroarea

12

3.4(3.5)

0.5(0.3)

0.7(1.0)

1.5(1.5)

Japan

4

1.0(1.0)

2.0(1.3)

0.8(0.9)

0.9(1.2)

China

18

3.0(3.0)

5.1(5.5)

4.5(4.7)

4.4(4.3)

Oil-importingEMEs?

34

4.5(4.3)

3.6(3.6)

3.0(3.0)

3.4(3.6)

Restoftheworld§

16

3.5(3.5)

1.7(1.4)

1.4(1.4)

1.3(1.7)

World

100

3.4(3.4)

2.9(2.8)

2.3(2.4)

2.6(2.7)

*

Sharesofgrossdomesticproduct(GDP)arebasedonInternationalMonetaryFund(IMF)estimatesofthepurchasing-power-parityvaluationofcountryGDPsfor2022fromtheIMF’sOctober2023WorldEconomicOutlook.Theindividualsharesmaynotaddupto100duetorounding.

?NumbersinparenthesesareprojectionsusedintheJulyReport.

?Theoil-importingemerging-marketeconomies(EMEs)groupingexcludesChina.ItiscomposedoflargeEMEsfromAsia,LatinAmerica,theMiddleEast,EuropeandAfrica(suchasIndia,BrazilandSouthAfrica)aswellasnewlyindustrializedeconomies(suchasSouthKorea).

§“Restoftheworld”isagroupingofothereconomiesnotincludedinthefirstfiveregions.Itiscomposedofoil-exportingEMEs(suchasRussia,NigeriaandSaudiArabia)andotheradvancedeconomies(suchasCanada,theUnitedKingdomandAustralia).

Sources:NationalsourcesviaHaverAnalyticsandBankofCanadacalculationsandprojections

1Theglobalprojectionwascompletedbeforethird-quarteractivitydataforChinawerereleased.

Box1

ChangestotheeconomicprojectionsincetheJulyReport

Globaloutlook

TheoutlookforglobalgrowthislargelyunchangedfromtheJulyReport,butsomecompositionaldifferencesarerelevantfortheCanadianoutlook:

Theoutlookforgrowthin2023intheUnitedStateshasbeenrevisedup.ConsumptionandinvestmentspendinghavebeengrowingfasterthanexpectedintheJulyReport,supportedbyastrongeroutlookforlabourforceparticipationandemployment.However,long-termbondyieldshaveincreasedsharplysinceJuly,andthehigherlevelsareexpectedtopersist.

Theassociatedtighteninginfinancialconditionslimitstheextentoftherevision,leavingthegrowthoutlookfor2024and2025broadlythesameasintheJulyReport.

Thegrowthoutlookfor2023inChinahasbeenreviseddown.China’spropertydevelopersareexperiencingrenewedfinancialstrain.Thisstressinthepropertysectorisweighingfurtheroneconomicsentiment,addingtopressuresinthebroaderfinancialsystemandslowingcreditgrowth.Asaresult,domesticdemandgrowthhasslowed.

Targetedpolicyactionsareexpectedtokeepgrowthin2024and2025roughlyunchangedfromtheoutlookintheJulyReport.

Canadianoutlook

SupplyanddemandintheCanadianeconomyarenowclosertobalance,butinflationarypressuresaremorepersistentthanexpected:

Growthingrossdomesticproduct(GDP)inthesecondquarterof2023waswellbelowexpectations.Householdspending—bothconsumptionandhousing—wasweakerthananticipated.ForestfiresandthePublicServiceAllianceofCanadastrikealsohadabiggernegativeimpactthanoriginallyestimated.

TheoutlookforGDPover2024hasbeenreviseddownbecauseofweakerconsumptionandhousingspending.Thisweaknessisduetoamoreprolongedimpactfrompastmonetarypolicytighteningandhigherlong-terminterestrates.

Table2andTable3onpage11presenttherevisionstotheforecastforGDPgrowth.

Potentialoutputhasbeenreviseddownslightlyovertheprojectionhorizon,reflectingongoingweaknessinproductivity.Unexpectedstrengthinpopulationgrowthhasprovidedapartialoffset.Overall,theprojectionnowbeginswiththeeconomybeinginasituationofslightexcesssupplyandremaininginexcesssupplythroughouttheforecast.

Theoutlookforconsumerpriceindexinflationthroughtotheendof2024hasbeenrevisedup.Abouthalfofthisrevisionreflectsthehigher

assumptionforoilprices.Shelterpriceinflationhasalsoincreased,andunderlyinginflationarypressuresaremorepersistentthanexpected.Elevatedinflationexpectations,corporatepricingbehaviourandstrongwagegrowthhavealsokeptunderlyinginflationarypressureshigherthanexpected.

Slowinginflation

Fallingenergypricesloweredinflationratesacrossmostregionsoverthefirsthalfoftheyear(Chart1).Morerecently,slowergrowthinpricesforboth

non-energygoodsandshelterhascontributedmoretodeclininginflationthanenergyhas.Inflationinservicespricesexcludingshelterhasbeenslowtoadjust.

Inflationinnon-energygoodspriceshasbeeneasingbecauseofsupplyanddemandfactors.Onthesupplyside,pressuresfromglobalsupplychain

bottleneckshavelessened.Atthesametime,pastincreasesininterestratesandashiftinspendingpatternsbacktowardhigh-contactserviceshaveslowedthedemandforgoods(Chart2).

Shelterpriceinflation,thoughgenerallystillhigh,isnowdeclininginmostadvancedeconomies.Thisisexpectedtoreduceoverallinflation,buttheextentoftheimpactwilllikelyvaryacrosscountries.Thisvariationispartlyduetodifferencesinhownationalpriceindexesmeasurehousingcosts(Box2).IntheUnitedStates,sheltercostsareexpectedtobeasignificantdriveroffallinginflationin2024becauserentisnotrisingassharplyasbefore.

Chart1:In?ationisslowing

Year-over-yearpercentagechange,monthlydata

a.Totalinflation b.Coreinflation

% %

12 8

10

8 6

6

4

4

2 2

0

-2

2020 2021 2022 2023

0

2020 2021 2022 2023

Canada CanadiancoreCPIrange UnitedStates Euroarea UnitedKingdom

Note:TherateofinflationiscalculatedbasedontheHarmonisedIndexofConsumerPricesfortheeuroareaandtheconsumerpriceindex(CPI)forallothercountries.CoreinflationisarangeofCPI-trimandCPI-medianforCanadaandCPIexcludingfoodandenergyfortheothercountries.

Sources:StatisticsCanada,USBureauofLaborStatistics,EurostatandOfficeforNationalStatistics(UnitedKingdom)viaHaverAnalyticsandBankofCanadacalculationsLastobservation:September2023

Chart2:Supplychainpressureshaveeased,andconsumerspendinghasshiftedfromgoodstoservices

a.GlobalSupplyChainPressureIndex,monthlydata b.Realconsumption,year-over-yearpercentagechange,seasonallyadjusted,quarterlydata

Index %

5 4

4 3

3 2

1

2

0

1

-1

0 -2

-1 -3

-2

2019 2020 2021 2022 2023

CanadaFranceGermany Italy Japan United

Kingdom

Goods Services

-4

UnitedStates

Note:TheGlobalSupplyChainPressureIndex(GSCPI)providesacomprehensivesummaryofpotentialsupplychaindisruptionsthatcontrolsfordemand-sidefactors.GSCPIreadingsmeasurestandarddeviationsfromtheindex’shistoricalaverage.Anincrease(decrease)intheindexreflectsanincrease(decrease)insupplychainpressuresfromhistoricalnorms.

Sources:FederalReserveBankofNewYork,StatisticsCanada,USBureauofEconomicAnalysisandOrganisationforEconomicCo-operationandDevelopmentviaHaverAnalyticsandBankofCanadacalculations

Lastobservations:panela,September2023;panelb,2023Q2

Box2

Strongdemand,tightlabourmarketsandtheimpactofbusinesses’inflationexpectationsontheirprice-settingbehaviourarehinderingtheadjustmentofinflationinservicesprices,particularlyintheUnitedStates.Asaresult,pricesofservicesareexpectedtoadjustgraduallyastightmonetaryconditionsslowdemand.Overall,inflationisexpectedtobeclosetocentralbanktargetsacrossmostmajoradvancedeconomiesin2025.

Di?erencesinshelterpriceinflationacrossadvancedeconomies

Manyadvancedeconomieshaveexperiencedlargemovementsinshelterpriceinflationoverthelastfewyears(Chart2-A).AfteramodestdeclineduringthefirstyearoftheCOVID-19pandemic,shelterpriceinflationroserapidlystartingin2021.Ithaspeakedinmosteconomiesbutremainswellabovethepre-pandemictrend.

Theserecentmovementsinshelterpriceinflationhavevariedwidelyacrosscountries.Thisisduetodifferencesineconomicconditionsineachcountryandthewaysheltercostsaremeasuredinacountry’sconsumerpriceindex(CPI).Ingeneral,shelterprice

inflationinmostadvancedeconomiesincludestwokeycomponents:rentalpriceinflationandowner-occupiedhousing(OOH)priceinflation.

Measuresofrentalpriceinflationareoftenbasedonsurveyresponses,thoughtheexactmethodtocalculate

Chart2-A:Shelterpricein?ationvarieswidelyacrosscountries

Shelterpriceinflationexcludingutilities,quarterlyandmonthlydata,year-over-yearpercentagechange

%

20

16

12

8

4

0

-4

2019 2020 2021 2022 2023

thismeasurevariesfromcountrytocountry.InCanada, Canada

UnitedKingdom

Sweden

informationintheCPIisupdatedmonthlybasedonsurveyresponses.IntheUnitedStates,survey

UnitedStatesEuroarea

AustraliaNewZealand

responsesaregraduallyphasedintotheCPIoversixmonths.Asaresult,changesinrentpricesinthe

USmarketshowupslowlyinofficialmeasuresandtheeffectsoninflationtendtobepersistent.

ForOOHpriceinflation,threeapproachesstandoutamongadvancedeconomies:

InCanadaandSweden,OOHpriceinflationiscalculatedusingavariationofausercostapproach.Thismethodestimatesthedirectcostofowningandoccupyingahome.Asaresult,itincludesbothout-of-pocketexpenses—suchasmortgageinterest,homerepairsandinsurance—andimplicitcoststhatahomeownerwouldnormallyincur,likedepreciation.

Othercountries,suchastheUnitedStates,calculateOOHpriceinflationusingarentalequivalenceapproach.Thismethodestimatesthemarketpricethathomeownerswouldpaytorentsimilaraccommodations.Thesecountriesdonotexplicitlyincludemortgageinterestcostsintheirshelterpriceindexes.

Note:TherateofinflationiscalculatedbasedontheHarmonisedIndexofConsumerPricesfortheeuroareaandtheconsumerpriceindexforallothercountries.DataarequarterlyforNewZealandandmonthlyforallothercountries.

Sources:StatisticsCanada,USBureauofLaborStatistics,Eurostat,UKOfficeforNationalStatistics,StatisticsSweden,AustralianBureauofStatistics,StatsNZviaHaverAnalyticsandBankofCanadacalculations

Lastobservations:Australia,August2023;NewZealand,2023Q3;others,September2023

AustraliaandNewZealanduseanetacquisitionsapproach,whichisbasedonthecostofpurchasingnewlybuiltproperties,excludingthevalueoftheland.Thesecountriesalsodonotexplicitlyincludemortgageinterestcostsintheirshelterpriceindexes.

TheweightofsheltercostsvariesacrossdifferentCPIbaskets.Sheltercostscompriseroughlyone-quarterofthebasketinCanadaandrangefromaboutone-tenthtoone-thirdinotheradvancedeconomies(Table2-A).OnemajorreasonforthisdifferenceisthatOOHisexcludedfromtheCPIstrackedbyseveralmajorcentralbanks,suchastheBankofEnglandandtheEuropeanCentralBank.

(continued…)

Box2(continued)

Table2-A:Weightsofsheltercomponentsintheconsumerpriceindex(CPI)

PercentageoftotalCPIbasket

Rent

Owner-occupiedhousing(portionofwhichismortgageinterestcosts)

Other

Shelterexcludingutilities

Canada

6.8

17.9(3.8)

1.0

25.7

UnitedStates

7.6

25.7

1.6

34.9

UnitedKingdom

7.9

N/A

1.3

9.2

Euroarea

5.6

N/A

3.9

9.5

Australia

5.8

8.6

4.7

19.0

NewZealand

9.6

9.8

5.4

24.7

Sweden

9.8

8.6(3.2)

1.0

19.3

Note:“Other”includesitemssuchasinsuranceandmiscellaneousservicesconnectedtothedwelling.

Sources:StatisticsCanada,USBureauofLaborStatistics,Eurostat,OfficeforNationalStatistics(UnitedKingdom),StatisticsSweden,AustralianBureauofStatisticsandStatsNZviaHaverAnalytics

Tighterfinancialconditions

GlobalfinancialconditionshavetightenedsincetheJulyReport.Mostnotably,yieldsonlong-termbondshaveseenasharprise(Chart3andBox1).Anumberoffactorscouldexplainwhyyieldshaverisen,and

separatingouttheircontributionsisdifficult.First,realyieldshaveincreased,dueinparttomarketexpectationsthatpolicyrateswillremainhigherforlonger.Second,thetermpremiumhasrisen,reflectingincreasedmarketuncertaintyabouthowhighpolicyinterestratesmayriseandhowlong

theymayremainelevated.Third,factorssuchasthelargefiscaldeficitintheUnitedStatesandhighissuanceofgovernmentdebtglobally,amidsoftdemandforsuchassets,mayalsobeplayingarole.Finally,theriseinlong-terminterestratesmayreflectthemarket’sreassessmentoftheneutral

rateofinterest.TheCanadiandollarhasbeenbroadlystableagainstthe

USdollarthisyear(Chart4),althoughithasappreciatedagainstabasketofothercurrencies.

Chart3:NorthAmericanlong-termbondyieldsareattheirhighestlevelssincebeforethe2008–09global?nancialcrisis

USandCanadian10-yeargovernmentbondyields,dailydata

%6

5

4

3

2

1

0

2007 2009 2011 2013 2015 2017 2019 2021 2023

Canada UnitedStates

Source:BloombergFinanceL.P.Lastobservation:October19,2023

Chart4:TheCanadiandollarhasbeenbroadlystableagainsttheUSdollarin2023

Canadianexchangerates,dailydata

JulyReport

Index135

US$0.88

130

0.84

125

0.80

120 0.76

115 0.72

110

2021 2022 2023

0.68

CEER(leftscale)

CEER,excludingtheUnitedStates(leftscale)

Can$/US$exchangerate(rightscale)

Note:CEERistheCanadianEffectiveExchangeRateindex—aweightedaverageofbilateralexchangeratesfortheCanadiandollaragainstthecurrenciesofCanada’smajortradingpartners.

Sources:BloombergFinanceL.P.andBankofCanadacalculationsLastobservation:October19,2023

ResilientUSdemand,sluggishnessinChina

TheUSeconomyhasgrownrobustlysincemid-2022.ConsumptionhasbeensupportedbystrongemploymentgrowthandhouseholdsspendingtheirsavingsaccumulatedduringtheCOVID-19pandemic.Strongconsumerdemandandaneasingofsupplyconstraintshaveboostedinvestment.

Growthisexpectedtodecelerateoverthecomingquartersandremainweakin2024.Thisislargelyduetotheimpactofpastinterestrateincreasesandtherecenttighteningofoverallfinancialconditions.Growthisprojectedtopickupin2025astheimpactofpastmonetarypolicytighteningeases.

Incontrast,growthinChinaslowedsharplyinthesecondquarterof2023afterthestrongreopeningeffectsobservedinthefirstquarterdissipated.Morerecently,problemsinChina’spropertysectorhaveintensifiedanew,leadingtoincreaseduncertaintyandsubduedsentiment.ForeigndemandforChina’sexportsisalsogrowingataslowerpace,andexportpriceshavebeenfalling.

Intheeuroarea,growthremainssluggish.Recentdatapointtoaslowdowninthesecondhalfofthisyearastheimpactofpastinterestrateincreasesandthetighteninginfinancialconditionsrestraingrowth.Growthisprojectedtopickupgraduallyover2024and2025astheeffectsofpastenergyshocksandmonetarytighteningfade.

Higheroilprices

GlobaloilpriceshavefluctuatedaroundahigherlevelthanassumedintheJulyReport.PricesrosesharplyafterSaudiArabiaandRussiacutoil

productionandexports.Subsequently,thewarinIsraelandGazahasledtofreshconcernsaboutoilsupplies.Theper-barrelpriceofBrentoilisassumedtobeUS$90throughouttheprojection,whichisUS$10higherthanassumedintheJulyReport(Box3).

Box3

Non-energycommoditypricesaremodestlylowerthanassumedintheJulyReport.Thedeclineprimarilyreflectsagriculturalprices,whichhavebroadlyfallenbecausefavourableweatherhasimprovedharvestforecasts.LumberpriceshavealsodeclinedbecauseweakhousingactivityacrossNorthAmericaisweighingondemand.

Keyinputstotheprojection

TheBankofCanada’sprojectionisconditionalonseveral