Bank of Canada expected to hold interest rate
The Bank of Canada is expected to hold key rates on hold this week as inflation continues to slow, but other data suggests the economy is still heating up.
The central bank is expected to announce its next interest rate decision on Wednesday. The announcement is accompanied by the latest economic forecasts for growth and inflation in the quarterly monetary policy report.
BMO chief economist Douglas Porter said the economy is growing faster than expected, but lower-than-expected inflation will force the Bank of Canada to keep its key rate at 4.5%. Stated.
“All of this combined certainly makes it more likely that (central) banks will keep rates on hold for the foreseeable future,” Porter said.
For months, the economic data on which the Bank of Canada relies to determine interest rates has given mixed signals about the state of the economy.
So far this year growth and employment have outperformed expectations, despite Bank of Canada key interest rates at their highest level since 2007.
After contracting slightly in December, real GDP increased by 0.5% in January. Statistics Canada’s preliminary estimates show that the economy in February he increased by 0.3%.
But a closer look at the economic growth numbers may not cause much concern, said Karyne Charbonneau, CIBC’s executive director of economics.
“Some of the strength we’re seeing in GDP appears to be the unwinding of some supply disruptions that are actually good for inflation,” Charbonneau said.
Meanwhile, companies continue to hire. In March, the Canadian economy added her 35,000 jobs, bringing the total number of jobs gained over the past six months to almost 350,000.
The unemployment rate has also remained stable at 5% for four consecutive months. This is just above his all-time low of 4.9% reached in the summer.
While this sustained economic strength is not necessarily what the Bank of Canada would like, lower inflation is good news.
In February, Canada’s annual inflation rate fell to 5.2%, marking the second consecutive month of below-expected inflation. An overall slowdown in inflation will come as supply chains recover and commodity prices fall.
The month-over-month inflation data show that inflation is actually quite close to the Bank of Canada’s 2% inflation target.
Given that the sharp rise in prices occurred mainly in the first half of 2022, Canadian inflation is expected to ease significantly in 2023, with most economists forecasting a fall to around 3% by midyear. doing.
As long as inflation continues to fall as expected, the Bank of Canada has no plans to raise interest rates further. We declared a conditional moratorium on rate hikes earlier this year, but left the door open for further rate hikes if needed.
The Bank of Canada appears cautiously optimistic that aggressive rate hikes from March 2022 to January 2023 will be strong enough to quell inflation.
The impact of higher interest rates could take up to two years to fully manifest in the economy and is expected to continue to spread across the economy, hampering growth.
A recent survey conducted by the Bank of Canada also shows that consumers and businesses are gearing up for a slowdown. Consumers reported plans to cut back on travel and eating out to save money. Meanwhile, companies expect sales to slow.
And while labor shortages remained a top concern for businesses, the survey showed signs of slowing labor market and wage growth.
“The findings really show that rate hikes are working,” Charbonneau said.
“I think all this is encouraging.”
This report by The Canadian Press was first published on April 7, 2023.