The Bank of Canada left its key interest rate unchanged at 5% again, saying it was still too early to consider cutting interest rates as underlying inflation persists.
Economists widely expected the central bank to maintain interest rates. The bank said in a note on its website that it remains concerned about underlying inflation that strips out volatile items such as food and fuel.
Bank of Canada Governor Tiff Macklem elaborated on these concerns in a press conference following the announcement.
He said global risks remain, including attacks on Red Sea shipping lanes that are impacting global shipping costs, and that escalating risks could lead to higher inflation. .
Bank of Canada Governor Tiff Macklem said the core inflation rate, which strips out the volatile portion of the consumer price index, allows the Bank of Canada to see where trends are.
Domestically, “underlying inflationary pressures are gradually easing. The risk is that they stall.” “We don’t want inflation to become effectively stalled. [2 per cent inflation] the goal. “
The central bank expects inflation to remain near 3% in the first half of this year and then ease gradually.
Macklem says ‘more time is needed’ for interest rates to rise
In prepared remarks, Macklem said there had been “no major surprises” since the central bank last announced interest rates in January.
Although Canada’s economy has avoided recession, 2023 was one of the weakest years for growth in recent years. GDP in January increased at an annual rate of 1%.
Meanwhile, the rate of price increases slowed, and the inflation rate fell to 2.9% in January. Food prices were still rising, but at a slower rate.
After two years of aggressive interest rate hikes, inflation appears to be back under control, and many Canadians are beginning to ask, “Where’s the peace of mind?” CBC’s Peter Armstrong looks at whether the Bank of Canada has met its goals and what we know about when interest rates could start falling.
“The board’s assessment is that we need to give the high interest rate policy time to implement its policy,” Macklem said.
The Bank of Canada maintains that it takes about 18 to 24 months for interest rate changes to be reflected in the economy.
“It would be great if this worked faster, it would be great if it was less painful, but unfortunately, monetary policy is slow to work,” Macklem said in response to questions from reporters afterward.
“This is an indirect channel. It has to work through the economy. It takes time.”
“I don’t want to give false accuracy.”
Macklem said on Wednesday that the central bank could not rule out the need to raise interest rates if inflation unexpectedly rose in January, but that the debate would shift from whether policy is sufficiently restrictive to the current level. He reiterated that the question now turns to how long these levels need to be maintained.
He said it was still too early to consider cutting rates. He said he expects the development of inflation to be gradual and uneven going forward.
“We want to give Canadians as much information as possible, but we don’t want to give them a false sense of accuracy,” Macklem said during the question-and-answer period.
The central bank last raised its key interest rate in July and has kept interest rates unchanged at 5% five times since then.
The bank first raised interest rates in March 2022, the start of an aggressive campaign to rein in inflation, resulting in 10 rate hikes in less than two years.
Economists say the meeting is more hawkish than expected
“There was a lot of reluctance at this meeting to talk about rate cuts,” said Veronica Clark, an economist at Citibank. She said, “You seem a little more hawkish than I expected.”
Most economists expect the first rate cut to occur in June. Clark said he expected the first rate cut to be in July, but that the central bank would take action if it determined that three-month core inflation remained within the bank’s target range.
Bank of Canada Governor Tiff Macklem said that while progress has been made in combating inflation, the Bank of Canada does not believe now is the right time to cut interest rates.
Clark added that we may only see one or two cuts this year. He said that largely depends on how quickly the US Federal Reserve lowers its own key interest rate.
“We also think we’ll see some weakening by the middle of this year.” [economic] “We will analyze US activity data,” she said, adding that the US would be in recession by then.
“That would almost certainly mean a significant decline in Canadian activity as well,” Clark said.
