OTTAWA—The Bank of Canada stayed true to its word from January that it would pause on interest rate hikes, but said it is “prepared to increase the policy rate further if needed to return inflation to the 2 percent target.”
Canada’s central bank held its overnight rate target at 4.5 percent on March 8, saying that “global economic developments have evolved broadly in line with the outlook in the January Monetary Policy Report (MPR).”
The pause marked the first time since January 2022 that the BoC did not raise rates. It raised interest rates eight consecutive times for a combined 4.25 percentage points starting in March 2022.
The bank did note that near-term outlooks for growth and inflation in the United States and Europe are “both somewhat higher than expected in January.”
The BoC pointed out that the U.S. dollar has strengthened. The Canadian dollar has weakened to below US$0.73.
Hot and Cold
Since announcing the pause on Jan. 25, the BoC has seen hot and cold economic data domestically.
“Overall, the latest data remains in line with the bank’s expectation that CPI [consumer price index] inflation will come down to around 3 percent in the middle of the year,” the bank said in a statement.
January’s annual inflation reading came down to 5.9 percent from 6.3 percent in December. However, food prices rose 10.4 percent—up from 10.1 percent in December.
The BoC said that core inflation measures, which attempt to remove the effects of more volatile items, are rising at about 5 percent annually and three-month core measures are rising at a rate of around 3.5 percent.
Commodity prices have also evolved in line with the bank’s expectations, but the bank said that the strength of China’s recovery and effects of Russia’s war in Ukraine remain factors that could push inflation higher.
Fourth-quarter gross domestic product (GDP) showed no growth, which was lower than what the BoC projected. This reading came after five straight quarters of GDP increases.
Household and government spending remained strong and net exports also increased but what brought down the rate of economic expansion was the growth of inventories slowing significantly.
The hot data came from the labour market with employment in January rising by 150,000 and the unemployment rate holding steady at 5.0 percent.
“The labour market remains very tight,” the bank said. Wages are growing at 4 percent to 5 percent.
The bank is expecting “weak economic growth for the next couple of quarters” to reduce pressures on the labour and product markets.
February’s reading on the labour market will be published on March 10.
The bank’s next rate decision comes on April 12. It will then also publish a new set of quarterly forecasts.
