Bank of Canada lifts interest rates to 4.5pc and plans to hold

Bank of Canada lifts interest rates to 4.5pc and plans to hold

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In the quarterly monetary policy report published alongside the decision, officials said the economy is still overheating. But growth is expected to decelerate rapidly as rate hikes weigh on household spending and help to bring inflation back within the bank’s inflation target by the middle of this year.

“If economic developments evolve broadly in line with the MPR outlook, Governing Council expects to hold the policy rate at its current level,” the bank said in the rate statement.

Still, policymakers cautioned more increases may be needed if economic data surprise to the upside. The bank “is prepared to increase the policy rate further if needed to return inflation to the 2 per cent target”.

‘Unexpected guidance’

The conditional pause — the first among Group of Seven central banks — suggests policymakers are convinced the current rate is restrictive enough to restore price stability.

Macklem and his officials “provided some unexpected guidance that this may be the peak” for rates, Andrew Grantham, an economist at Canadian Imperial Bank of Commerce, said in a report to investors. He predicted that “the economy will indeed evolve in-line or even a little weaker than the bank suspects, and that today’s hike in interest rates will indeed mark the final one of this cycle.”

In their report, officials raised their estimate of economic growth in 2022 to 3.6 per cent and forecast a 1 per cent expansion this year, up from 3.3 per cent and 0.9 per cent in their October projections. The chances of two consecutive quarters of negative growth, a so-called technical recession, are nonetheless seen as “roughly the same” as a small expansion in 2023.

Beyond slowing core measures, policymakers flagged global supply chain conditions and lower energy prices as reasons the central bank sees inflation coming down “significantly” this year.

The Bank of Canada, which led its global peers in raising rates rapidly last year, could now be laying out a blueprint for how they pivot to pausing.

Globally, the economic outlook is improving amid Europe’s resilience during an energy crisis, China’s reopening, and subsiding inflationary pressures from declining commodity prices and easing supply challenges.

For Canada, assessing the balance of risks between over and under-tightening monetary policy is complicated by a mixed data picture.

While headline inflation has fallen to 6.3 per cent from a peak of 8.1 per cent in June, expectations remain elevated. A tight labour market continued to add jobs at the end of last year, and there’s little evidence yet of any rapid gearing down of economic growth that could allow supply to catch up with demand.

Still, Canadian households — among the most indebted among advanced countries — continue to feel the pinch of higher rates and rising prices for shelter and food. The nation’s housing activity has slowed considerably, and consumption spending is expected to decline further.

“There is growing evidence that restrictive monetary policy is slowing activity, especially household spending,” the bank said in its statement.

Officials flagged sticker services price inflation as the biggest upside risk to their outlook.

Wednesday’s decision marks the first time in the Bank of Canada’s history that the public will get a glimpse of its interest-rate setting process, joining central banks such as the US Federal Reserve and Bank of England in sharing records of their policy meetings. A minutes-like summary of the bank’s deliberations will be published on February 8.

Bloomberg

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