“Navigating the Pause: Bank of Canada to Hold Interest Rate Under Planned Hikes”
Economists generally anticipate that the Bank of Canada will stick to its plan of holding its key interest rate steady at its next scheduled announcement, one year after the central bank’s aggressive rate hike cycle started.
According to Karyne Charbonneau, given recent economic data showing inflation is trending downward and the economy has slowed, the central bank will likely feel confident about its decision to pause rate hikes when it makes its rate decision next week.
According to Charbonneau, executive director of economics at CIBC, “They wouldn’t want to announce a pause and then immediately not follow through with (it)”.
The key rate of the central bank has increased since last March from nearly zero to 4.5 percent, the highest level since 2007.
Bank of Canada to Hold Interest Rate Under Planned Hikes
The Bank of Canada stated that it would take a conditional pause in order to give the economy some time to adjust to higher borrowing costs when it announced its eighth consecutive rate hike in January.
However, it made it clear that the pause was conditional and that it would be prepared to jump back in and raise interest rates if the economy remained brisk or the rate of inflation didn’t decline quickly enough.
The next rate decision by the central bank is scheduled for Wednesday.
The nation appears to be edging closer to a normal rate of price growth, according to the most recent inflation data. The annual inflation rate in Canada decreased to 5.9% in January from its peak of 8.1% in the summer.
Additionally, recent monthly trends indicate that inflation is moving much closer to the Bank of Canada’s target inflation rate of 2%.
In the meantime, increased borrowing costs are hindering economic growth.
Higher interest rates, which are intended to slow the economy by incentivizing consumers and businesses to cut back on spending, will eventually put more of a strain on households, according to Nathan Janzen, assistant chief economist at RBC.
As debt payments rise this year, he added, “(there’s) still good reason to think that consumer spending will start to slow.
According to the most recent GDP report from Statistics Canada, the Canadian economy shrank to zero growth in the fourth quarter, but consumer spending remained strong and kept things afloat despite the disappointing data.
While that report revealed a much worse state of the economy than analysts had anticipated, a preliminary estimate from the federal agency revealed that the economy recovered in January, posting a 0% growth rate.
The full impact on the economy will be felt “much later this year,” according to Charbonneau, given that the Bank of Canada’s most recent rate hike was only a little over a month ago. “.
The Bank of Canada may have found one worrying statistic, and that was January’s strong employment numbers. In the first month of the year, the economy generated an enormous 150,000 new jobs, which helped to keep the unemployment rate at a low 5%.
A tight labor market is a sign of an overheated economy that is causing inflation, according to Bank of Canada governor Tiff Macklem, even though a strong labor market is good for workers.
If demand drops, businesses that face declining sales will probably change their hiring plans, leading to an increase in unemployment.
Charbonneau and Janzen concur that the Bank of Canada has made sufficient progress to warrant delaying rate increases going into next week’s rate decision.
In contrast, the central bank was under intense fire in March of last year for not acting quickly enough to contain the inflation that was out of control.
This time last year, it was beginning to become fairly obvious that central banks were lagging behind in raising interest rates, according to Janzen.
From almost zero at the beginning of 2022,The U. S. Federal Reserve raised its benchmark lending rate to 4 point 5 to 4 point 75 percent.
Upon the most recent U. S. The Fed is widely anticipated to increase its key rate to at least 5% by June based on the inflation reading.
The Fed’s most recent increase was only a quarter of a percentage point, but one board member has openly advocated returning to increases of half a percentage point.
In a press conference held following the conclusion of the Fed meeting on Feb. 1. Chairman Jerome Powell had emphasized that the U.S. S. was gradually cooling down despite still being too high. A deep recession and widespread layoffs weren’t necessary, he added, for the Fed to be able to control inflation.
The majority of economists in Canada believe that a mild recession will occur this year, despite interest rates being at a 16-year high.
However, Charbonneau claimed that despite these projections, the risks still favor low interest rates, making rate increases more likely than decreases for the foreseeable future.