Bank of Canada expected to hold rates

Ottawa –

A year into the Bank of Canada’s aggressive rate hike cycle, economists are widely expecting the Bank of Canada to stick with its plan to keep key rates unchanged at its next scheduled announcement.

Carine Charbonneau said the central bank will pause rate hikes next week when it makes its rate hike decision as recent economic data show inflation is trending down and the economy is slowing. He said he was likely confident in his move.

Charbonneau, CIBC’s executive director of economics, said, “After announcing the moratorium, they wouldn’t want it not implemented immediately.”

Since March last year, the central bank has raised the key interest rate from near zero to 4.5%. This is his highest since 2007.

The Bank of Canada announced its eighth consecutive rate hike in January, while saying a conditional moratorium was needed to give the economy time to react to rising borrowing costs.

But he stressed that the moratorium is conditional, and made it clear that if the economy continues to overheat or inflation doesn’t come down enough, it’s ready to resume and raise interest rates further.

The central bank’s next rate decision is set for Wednesday.

The latest inflation data suggests the country is moving closer to normal inflation. Canada’s annual inflation rate slowed to 5.9% in January, from a peak of 8.1% it reached in the summer.

Also, recent monthly trends show that inflation is well closer to the Bank of Canada’s 2% target.

Meanwhile, rising borrowing costs are weighing on economic activity.

RBC Assistant Chief Economist Nathan Janzen said the rate hike was intended to dampen economic momentum by encouraging people and businesses to spend less, which would ultimately put household budgets under greater pressure. Stated.

“There is still good reason to believe that consumer spending will start to slow down this year as debt payments rise,” he said.

Statistics Canada’s latest GDP report shows that the Canadian economy stagnated in the fourth quarter, recording zero growth.

That report showed a far darker economy than forecasters expected, but preliminary estimates from federal agencies say the economy rebounded in January, registering growth of 0.3%. was shown.

Given that the Bank of Canada’s last rate hike was just over a month ago, Charbonneau said the full impact on the economy would be “until much later in the year”.

Perhaps one of the concerns for the Bank of Canada was the strong hiring numbers in January. The economy added a whopping 150,000 jobs in the first month of the year, keeping the unemployment rate he low of 5%.

A strong labor market is good news for workers, but Bank of Canada Governor Tiff Macklem has repeatedly said a tight labor market is a sign of an overheated economy that is fueling inflation.

When demand falters, businesses facing declining sales are likely to change their hiring plans, leading to higher unemployment rates.

Heading into next week’s rate decision, both Charbonneau and Janzen believe the Bank of Canada has taken enough steps to warrant a moratorium on rate hikes.

But the central bank was in a very different position last March, facing harsh criticism for taking too long to contain the rise in inflation.

“A year ago at this point, it was starting to become pretty clear that central banks were lagging behind when it came to raising rates,” Janzen said.

The US Federal Reserve has raised its benchmark lending rate from near zero in early 2022 to 4.5% to 4.75%.

The Fed is widely expected to raise the key rate to at least 5.25% by June after the latest US inflation readings.

The Fed’s latest rate hike was a quarter percentage point, but one of the Fed’s board members has publicly suggested returning it to a 0.5 percentage point hike.

At a press conference after the Fed’s meeting on February 1st, Chairman Jerome Powell stressed that US inflation was still too high, but was gradually declining. He also suggested the Federal Reserve could keep inflation in check without raising interest rates high enough to cause widespread layoffs or a deep recession.

In Canada, interest rates are currently at their highest level in 16 years, and most economists expect a mild recession this year.

But despite these projections, Charbonneau said the risks still tipped in the direction that interest rates weren’t high enough, with rate hikes more likely than cuts in the foreseeable future.


Using file from Associated Press

This report by the Canadian Press was first published on March 3, 2023.

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