One 12 months after the Bank of Canada’s aggressive rate hike cycle began, economists widely expect the central bank will follow its plan of holding its key rate of interest regular 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 need to announce a pause after which immediately not undergo 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 very best it’s been since 2007.
While announcing its eighth consecutive rate hike in January, the Bank of Canada said it will take a conditional pause to permit the economy time to react to higher borrowing costs.
It stressed the pause was conditional, nonetheless, making it clear that it’ll be able to jump back in and lift rates of interest further if the economy keeps running hot or inflation doesn’t come down quickly enough.
The central bank’s next rate decision is ready for Wednesday.
Probably the most recent inflation data suggests the country is inching closer to normal price growth. Canada’s annual inflation rate slowed to five.9 per cent in January, down from the height of 8.1 per cent reached in the summertime.
And up to date monthly trends show inflation is heading much closer to the Bank of Canada’s two per cent goal.
Meanwhile, higher borrowing costs are weighing on economic activity.
RBC assistant chief economist Nathan Janzen said higher rates of interest, which are supposed to take the steam out of the economy by encouraging people and businesses to drag back on spending, will eventually squeeze households more noticeably.
“(There’s) still good reason to think that consumer spending will begin to slow … as debt payments rise this 12 months,” he said.
Statistics Canada’s latest GDP report shows the Canadian economy was treading water within 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 total effects on the economy will likely be felt “much later this 12 months.”
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 primary month of the 12 months, keeping the unemployment level at a low five per cent.
And while a powerful labour market is sweet news for staff, Bank of Canada governor Tiff Macklem has said repeatedly that the tightness within 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 an increase in unemployment.
Heading into next week’s rate decision, each Charbonneau and Janzen consider the Bank of Canada has done enough to merit the pause in rate mountain climbing.
Nevertheless, the central bank was in a really different place last March, facing harsh criticism for waiting too long to restrain rising inflation.
“A 12 months ago, right now, it was beginning to grow to be pretty clear that central banks were behind the curve when it comes to rate of interest hikes,” Janzen said.
The U.S. Federal Reserve has raised its benchmark lending rate to 4.5 per cent to 4.75 per cent from near zero in the beginning of 2022.
After the newest U.S. inflation reading, the Fed is widely expected to lift its key rate to at the least 5.25 per cent by June.
The Fed’s latest increase was 1 / 4 of a percentage point, but one Fed board member has publicly suggested going back to hikes of half a percentage point.
At a news conference after the Fed’s meeting ended Feb. 1, Chairman Jerome Powell had stressed that inflation within the U.S., while still too high, was steadily cooling. He also suggested that it was still possible that the Fed could quell inflation without raising rates so high as to cause widespread layoffs and a deep recession.
In Canada, with rates of interest now at a 16-year high, most economists anticipate a light recession sometime this 12 months.
But despite these forecasts, Charbonneau said the risks are still tilted toward rates of interest not being high enough, making rate hikes more likely than cuts for the foreseeable future.
– With files from The Associated Press
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