A year after the start of the Bank of Canada’s aggressive rate-hike cycle, economists generally expect the central bank to stick to its plan of keeping its key rate steady in its next scheduled announcement. .
In making its rate decision next week, the central bank likely feels assured of its decision to hold rate hikes on hold, Karyne Charbonneau said, given recent economic data showing that inflation is down and that the economy slowed down.
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“They wouldn’t want to announce a pause and then immediately not go through 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%, the highest since 2007.
While announcing its eighth consecutive rate hike in January, the Bank of Canada said it would take a conditional pause to give the economy time to react to rising borrowing costs.
He stressed, however, that the pause was conditional, saying he would be prepared to backtrack and raise interest rates further if the economy continues to run at full steam or if inflation does not come down fast enough.
The central bank’s next rate decision is set for Wednesday.
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The most recent inflation data suggests that the country is approaching normal price growth. Canada’s annual inflation rate slowed to 5.9% in January, down from a summer high of 8.1%.
And recent monthly trends show that inflation is getting much closer to the Bank of Canada’s 2% target.
At the same time, rising borrowing costs are weighing on economic activity.
RBC deputy chief economist Nathan Janzen said higher interest rates, which aim to slow the economy by encouraging individuals and businesses to cut spending, will eventually squeeze households more significantly.
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“(There are) still good reasons to think that consumer spending will start to slow…as debt repayments pick up this year,” he said.
Statistics Canada’s latest GDP report shows Canada’s economy stalled in the fourth quarter, posting flat growth, but beneath the disappointing data was resilient consumer spending that was keeping the economy afloat.
While that report showed a much bleaker economy than forecasters expected, a preliminary estimate from the federal agency showed the economy rebounded in January, posting 0.3% growth.
Given that the Bank of Canada’s last rate hike was just over a month ago, Charbonneau said the full effects on the economy will be felt “much later this year.”
Perhaps the most worrisome number for the Bank of Canada was the strong January jobs numbers. The economy added 150,000 jobs in the first month of the year, keeping the unemployment rate down to a low 5%.
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And while a strong labor market is good news for workers, Bank of Canada Governor Tiff Macklem has repeatedly said that a tight labor market is a symptom of an overheated economy that fuels inflation.
If demand weakens, companies facing a drop in sales will likely change their hiring plans, leading to higher unemployment.
Heading into next week’s rate decision, Charbonneau and Janzen believe the Bank of Canada has done enough to merit the pause in rate hikes.
However, the central bank was in a very different position last March, facing severe criticism for waiting too long to contain rising inflation.
“A year ago, around this time, it was starting to become pretty clear that central banks were lagging behind in terms of raising interest rates,” Janzen said.
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The US Federal Reserve raised its benchmark lending rate from 4.5% to 4.75%, from near zero at the start of 2022.
After the latest US inflation reading, the Fed is expected to raise its key rate to at least 5.25% by June.
The Fed’s last hike was a quarter of a percentage point, but a member of the Fed’s board has publicly suggested a return to half-percentage-point hikes.
In a press conference after the end of the Fed meeting on February 1, Chairman Jerome Powell pointed out that inflation in the United States, although still too high, was gradually cooling. He also suggested it was still possible the Fed could stifle inflation without raising rates to such a level that it causes widespread layoffs and a deep recession.
In Canada, with interest rates now at their highest level in 16 years, most economists are predicting a mild recession later this year.
But despite those forecasts, Charbonneau said the risks are still tilted toward interest rates that aren’t high enough, making rate hikes more likely than rate cuts for the foreseeable future.
– With files from the Associated Press
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