Bank of Canada Keeps Rates Steady with Potential for Future Hike

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The Bank of Canada has left interest rates unchanged, but it is still uncertain how it will proceed with rate hikes given the current inflation rate. The announcement was made on Wednesday, with the bank stating that it is maintaining its key overnight rate at 4.5%. Governor Tiff Macklem has said that the bank is open to a rate hike if inflation persists. In February, the inflation rate had fallen to 5.2%, which is lower than the peak of 8.1% in June 2021 but still higher than the bank’s target of 2%.

While the bank expects the inflation rate to fall quickly to around 3% by the middle of this year and then decline more gradually to the 2% target by the end of 2024, achieving this target may be challenging. The bank has stated that getting inflation the rest of the way back to 2% could be difficult, as inflation expectations are coming down slowly, service price inflation and wage growth remain elevated, and corporate pricing behavior has yet to normalize.

Finance

The bank began an aggressive rate-hike campaign in March 2022 to drive inflation down. The overnight rate was pushed to 4.5% from 0.25%. A 25-basis-point increase in January came with a statement from Macklem saying that the bank was at least temporarily stopping hikes. The earlier series of rate hikes is still working its way through the economy, but the bank is concerned that Canada’s economy is growing too quickly, which could push inflation higher.

The bank is worried that the Canadian economy is stronger than earlier forecasts had suggested. It predicts that the Canadian economy will grow by 1.4% this year, up from a January forecast of 1%. In October, the bank predicted the economy would grow by just 0.9% this year. Last July, its growth prediction for 2023 was 1.8%. The bank’s strategy risks putting more people out of work and hurting workers’ wages, according to Jim Stanford, chief economist at the Centre for Future Work.

In the event that the bank does decide to raise rates this year, it could suffer a big hit to its forecasting credibility. It would be tantamount to admitting they hadn’t gone far enough earlier and that a “conditional pause” announced in January was wrong, according to Pedro Antunes, chief economist at the Conference Board of Canada. However, the bank is trying to show both sides of the economic coin, according to BMO chief economist Douglas Porter. He added that the bank’s statement was a little more hawkish than markets were expecting, with the likelihood of a rate cut by the end of the year dropping slightly.

The bank’s decision to leave interest rates unchanged is likely to be met with mixed reactions. Some may be relieved that the bank is not increasing rates, while others may be concerned about the implications of persistently high inflation. Given the uncertainty surrounding the economy and inflation, it remains to be seen how the bank will proceed with its interest rate policy going forward.

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