The Bank of Canada has announced that it will maintain its policy rate, with the overnight rate at 4.5%, the bank rate at 4.75%, and the deposit rate at 4.5%. The Canadian dollar fell against the US dollar following the announcement to a four-month low, trading at 72.54 US cents.
This announcement comes after economic growth was found to have flattened in Q4 of 2022, while government spending, consumption and net exports have increased. Restrictive monetary policy was also found to have slowed household spending, while business investment slackened alongside reduced domestic and foreign demand.
The labour market has however remained tight, with employment growth having risen while unemployment falling to record lows. This was further buoyed by wages having grown by 4% to 5%, despite a decline in productivity.
Inflation fell to 5.9% in January from a record high of 8.1% in April 2022, aided by a decline in the pricing of durable goods, energy and some services. The cost of living for Canadians, however, remained high due to sustained food and shelter prices.
Despite the mixed results, the Bank of Canada expects the CPI inflation to fall to about 3% by mid-year. As a result, the Governing Council has opted to maintain the policy rate at 4.5%, alongside quantitative tightening. Rate increases are still a possibility but will depend on economic developments and what further impact past rate increases will elicit.
This move was expected by financial experts following the eighth consecutive hike rate that was announced by the Bank of Canada in January 2023. At the time, the council confirmed it would maintain its key rate if economic developments were in line with their forecasts.
The government appears to be pursuing a different approach to its southern neighbour as the US Federal Reserve indicated it would continue to hike rates. While experts like economics professor at Laval University, Stephen Gordon, say that it is not automatic for Canada to follow the US’s lead, he does point out that their monetary policy will have implications for Canada. This includes higher rates in the US attracting more investors and causing the price of imports for Canada to rise and the Canadian dollar to weaken.
Gordon estimates that unless a surprise crops up that would force the government to hike rates further, inflation seems on track to keep slowing as the year progresses, thanks to base-year effects. Interest rate hikes are also estimated to take as much as two years to achieve full effect, meaning the economy needs to be given more time to react to the increases already made. The next interest rate decision is expected to be announced on April 12.
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