Continuing rate freeze indicates commitment to rein in economic volatility and sticky inflation levels, analysts say
The Bank of Canada’s latest decision to keep its benchmark interest rate at 5% is further confirmation of the institution’s commitment to rein in economic volatility and sticky inflation levels, according to market observers.
RBC Economics noted that the 22-year-high policy rate is proving sufficient to moderate the economy, and all it needs is more time to do its work.
“Interest rates are already at levels that are high enough to restrict economic activity and wobbly-looking GDP growth and labour market backdrops mean the most likely trajectory for inflation going forward is still lower,” RBC said.
“’Core’ inflation measures have not yet shown the ‘sustained’ downward pressure towards the 2% target rate the BoC wants to see before pivoting to interest rate cuts. But we expect slower price growth alongside a weakening economic backdrop will push the BoC to start gradually lowering the policy rate late by mid-year.”
Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO Economics, said that the BoC struck a guarded stance in its decision to keep the policy rate steady for the fourth straight meeting.
“The tone of the statement was generally cautious about the economic outlook, but continued to signal concern about the stickiness of core inflation,” Reitzes said. “Notably, the BoC also continues with quantitative tightening (QT) or balance sheet normalization, despite some chatter in the lead up that we could see some changes there.”
The Bank of Canada has left its policy rate unchanged in its first announcement of the year.
— Canadian Mortgage Professional Magazine (@CMPmagazine) January 24, 2024
More on this: https://t.co/umMkH8ywBF#breakingnews #mortgageindustry #marketupdates #interestrates
Reitzes added that the BoC’s announcement indicates its belief that the Canadian economy “is now running in excess supply.”
“That should be encouraging for policymakers as it drives disinflationary pressure,” he said. “The rapid and sizeable rate hikes over the past two years are doing their job, but it looks like we’ll be at 5% for a while yet as the BoC wants to see a further slowing in inflation. BMO’s call for a June start to rate cuts looks perfectly reasonable at the moment.”
Dominion Lending Centres Group (DLCG) chief economist Sherry Cooper said that there are clear signs of the current monetary policy being successful in putting out the inflation fire.
“The road to 2% inflation is bumpy, but we are heading there probably sooner than the [Bank of Canada] expects,” Cooper said. “They are staying the course for now, but multiple rate cuts are likely this year. The scheduled dates for announcing the policy rate are March 6, April 10, June 5 and July 24. The Bank of Canada will begin cutting the overnight rate somewhere in there.”
Cooper is anticipating the June meeting to be the most likely starting point of the rate cuts, “but if I’m wrong, it will likely be sooner rather than later.”
“Once they begin to take rates down, they will do so gradually, 25 basis points at a time, and over a series of meetings. We could well see rates fall by 100-to-150 bps this year.”
