This morning, the Bank of Canada held the key interest rate unchanged at 4.5% - a decision that was largely anticipated by market participants and marking the first pause after eight consecutive rate hikes. While we may have seen a break in rate hikes today, the message is still loud and clear from the bank – they are continuing its policy of quantitative tightening.

 

 

Although inflation is easing, it is still high, coupled with a tight labour market. The bank will continue to assess economic developments from previous rate hikes and will continue to do that. In other words, further rate hikes are not off the table as the bank aims to bring inflation down to 2%.

 

Canadian economic growth came in flat in Q4 of 2022 and in January we saw inflation easing to 5.9%. We can thank lower price increases in energy, durable good and a part of the service sector for that. It’s a different story if we look at food and shelter cost, which remain at heightened levels causing continued hardship for Canadians. Perhaps this in part lead the BoC to remove language of ‘excess demand’ in the economy in their statement; when more household dollars go to fixed expenses, less are available to go discretionary items. 

 

The Loonie experienced a decline following the announcement, adding to the pressure after Federal Reserve Chair Jerome Powell’s remarks yesterday. If the Fed moves to raise rates in the US to 5.5% and we remain at 4.5%, the potential 100bps spread is widely regarded as the maximum comfortable lag.

 

Overall, the BoC finds the economy evolving as anticipated in its January forecasts noting that “data remains in line with the bank’s expectations that CPI inflation will come down to around 3% in the middle of this year.”. The decision today was not accompanied by press conference but market participants will be closely monitoring economic data until the next rate announcement on April 12.