BoC is expected to hold interest rate
While announcing its eighth consecutive rate hike in January, the Bank of Canada said it would take a conditional pause to allow the economy time to react to higher borrowing costs.
One year after the Bank of Canada’s aggressive rate hike cycle began, economists widely expect the central bank will stick to its plan of holding its key interest rate steady at its next scheduled announcement.
In making its rate decision next week, the central bank likely feels assured about its move to pause rate hikes, said Karyne Charbonneau, given recent economic data showing inflation is trending downward and the economy has slowed.
“They wouldn’t want to announce a pause and then immediately not go through with (it),” said Charbonneau, CIBC’s executive director of economics.
Since last March, the central bank has raised its key rate from near-zero to 4.5 per cent, the highest it’s been since 2007.
While announcing its eighth consecutive rate hike in January, the Bank of Canada said it would take a conditional pause to allow the economy time to react to higher borrowing costs.
It stressed the pause was conditional, however, making it clear that it’ll be ready to jump back in and raise interest rates further if the economy keeps running hot or inflation doesn’t come down quickly enough.
The central bank’s next rate decision is set for Mar. 8.
The most recent inflation data suggests the country is inching closer to normal price growth. Canada’s annual inflation rate slowed to 5.9 per cent in January, down from the peak of 8.1 per cent reached in the summer.
And recent monthly trends show inflation is heading much closer to the Bank of Canada’s two per cent target.
Meanwhile, higher borrowing costs are weighing on economic activity.
RBC assistant chief economist Nathan Janzen said higher interest rates, which are meant to take the steam out of the economy by encouraging people and businesses to pull back on spending, will eventually squeeze households more noticeably.
Statistics Canada’s latest GDP report shows the Canadian economy was treading water in the fourth quarter, posting zero growth, but beneath the disappointing data was resilient consumer spending keeping the economy afloat.
While that report showed a much grimmer economy than forecasters were expecting, a preliminary estimate from the federal agency showed that the economy bounced back in January, posting 0.3 per cent growth.
Given the Bank of Canada’s last rate hike was just over a month ago, Charbonneau said the full effects on the economy will be felt “much later this year.”
Perhaps the one worrying figure for the Bank of Canada was the strong employment numbers for January. The economy added a whopping 150,000 jobs in the first month of the year, keeping the unemployment level at a low five per cent.
And while a strong labour market is good news for workers, Bank of Canada governor Tiff Macklem has said repeatedly that the tightness in the labour market is a symptom of an overheated economy that’s fueling inflation.
If demand falters, businesses facing lower sales will likely alter their hiring plans, causing a rise in unemployment.
Heading into next week’s rate decision, both Charbonneau and Janzen believe the Bank of Canada has done enough to merit the pause in rate hiking.
