Bank of Canada keeps rates on hold, sees stronger 2023 growth

THE Bank of Canada (BOC) on Wednesday (Apr 12) left its key overnight interest rate on hold at 4.50 per cent as expected and raised its growth forecast for this year, while dropping language that had warned of a possible recession.

Last month the Bank of Canada (BOC) became the world’s first major central bank to pause its tightening campaign. Governor Tiff Macklem said he wanted to let the eight previous rate hikes sink in and would hold off on further increases as long as inflation came down as forecast.

All 33 economists polled by Reuters agreed the bank would hold its key overnight rate steady. Inflation has been edging down, reaching 5.2 per cent in February after peaking at 8.1 per cent, but is still far above the bank’s 2.0 per cent target.

“The Bank expects CPI inflation to fall quickly to around 3 per cent in the middle of this year and then decline more gradually to the 2 per cent target by the end of 2024,” it said in a statement, blaming services prices and wage growth for the slow decrease.

Previously the BOC had been less specific about when inflation would reach target, saying it would happen sometime next year. At the same time, the BOC raised its growth forecast for this year to 1.4 per cent from 1.0 per cent in January.

“Demand is still exceeding supply and the labour market remains tight,” it said, adding that growth would stay weak through the rest of the year. It dropped language from January saying there was a chance for “a couple of quarters with slightly negative growth”.

The BOC said it was still prepared to raise rates if necessary, and while acknowledging tighter credit conditions in the US and Europe caused by recent banking stresses, it said the situation was improving.

“Funding costs for US banks have increased, and concerns exist that conditions could deteriorate further,” it said. “More recently, financial markets have largely stabilised, and many indicators of financial conditions have improved.”

Last month, deputy governor Toni Gravelle said the BOC was “ready to act in the event of severe market-wide stress” in the financial system, adding Canada was nowhere near that point. REUTERS