Bank of Canada Holds Rates at 4.50% as Expected, Sees Inflation at 2% End of 2024

Bank of Canada maintained its overnight rate at 4.50% in April 2022, as expected. The move follows the aggressive hikes from last year meetings. The BOC stated that it will continue to monitor the latest economic data for future decisions on the policy rate. The Governing Council believes that current borrowing costs are restrictive enough to bring inflation down to the 2% level and opted to support slowing growth. The Bank had raised eight consecutive rate times pushing borrowing costs to the highest level since 2008. This is the just the second meeting where the Bank of Canada held rates unchanged in 12 months.

Bank of Canada Building

BoC Highlights

  • The overnight rate remains 4.50% Prior overnight rate was 4.50%
  • Governing Council continues to assess whether monetary policy is sufficiently restrictive to relieve price pressures and remains prepared to raise the policy rate further if needed to return inflation to the 2% target.
  • 2023 GDP forecast 1.4% vs 1.0% prior
  • 2024 GDP forecast 1.3% vs 1.8% prior
  • 2025 GDP growth in 2025 2.5%
  • “Economic growth in the first quarter looks to be stronger than was projected in January, with a bounce in exports and solid consumption growth”
  • Monetary Policy Report projects global growth of 2.6% this year, 2.1% in 2024, and 2.8% in 2025
  • Previously forecast inflation would fall to around 3% in the middle of 2023 and back to target in 2024
  • Inflation in many countries is easing
  • Labour markets remain tight and measures of core inflation in many advanced economies suggest persistent price pressures, especially for services.
  • Global economic growth has been stronger than anticipated
  • US growth is expected to slow considerably in the coming months
Canada Interest Rate
 Bank of Canada overnight rate

Market Reaction

  • US to the Canadian dollar USD/CAD saw the CAD soften a little soon after the decision with the price moving up to test its 200-hour moving average at 1.34800, but sellers came in and the price rotated back to the downside.
  • The pair traded at 1.3440 just off the low for the day at 1.34316.
  • Rate divergence between US and Canada

Sticky Inflation

Lower energy prices helped inflation to fall to 5.2% in February after hitting the 39-year high of 8.1% in June 2022, and the central bank’s updated monetary policy report expects inflation to slow to 3% by the middle of the year before gradually reaching the target of 2% by the end of 2024. On the growth front, the governing council revised GPD estimates to grow 1.4% this year and 1.3% in 2024, before picking up to 2.5% in 2025

Bank of Canada’s Quarterly Monetary Policy Report (March 2023)

  • 2023 GDP seen at 1.4% vs 1.0% prior
  • 2024 GDP seen at 1.3% vs 1.8% prior
  • 2025 GDP seen at 2.5%
  • 2023 CPI seen at 3.0% vs 3.6% prior
  • 2024 CPI seen at 2.0% vs 2.3% prior
  • Goods price inflation is easing quickly, reflecting lower energy prices, improved global supply chains and the effects of restrictive monetary policy on sectors sensitive to interest rates. Inflation is then forecast to return the rest of the way to the 2% target more gradually because services price inflation is responding more slowly to the effects of restrictive monetary policy.
  • Strong population growth is supporting aggregate consumption and employment growth. Household spending is being restrained by higher interest rates.
  • At current interest rates, the share of income spent on interest payments will continue to rise as homeowners renew their mortgages. Growth in business investment and exports is also expected to soften, reflecting increased borrowing costs and weaker foreign demand.

Bank of Canada Full Rate Statement for March 2023

The Bank of Canada today held its target for the overnight rate at 4½%, with the Bank Rate at 4¾% and the deposit rate at 4½%. The Bank is also continuing its policy of quantitative tightening.

Inflation in many countries is easing in the face of lower energy prices, normalizing global supply chains, and tighter monetary policy. At the same time, labour markets remain tight and measures of core inflation in many advanced economies suggest persistent price pressures, especially for services.

Global economic growth has been stronger than anticipated. Growth in the United States and Europe has surprised on the upside, but is expected to weaken as tighter monetary policy continues to feed through those economies. In the United States, recent stress in the banking sector has tightened credit conditions further. US growth is expected to slow considerably in the coming months, with particular weakness in sectors that are important for Canadian exports. Meanwhile, activity in China’s economy has rebounded, particularly in services. Overall, commodity prices are close to their January levels. The Bank’s April Monetary Policy Report (MPR) projects global growth of 2.6% this year, 2.1% in 2024, and 2.8% in 2025.

In Canada, demand is still exceeding supply and the labour market remains tight. Economic growth in the first quarter looks to be stronger than was projected in January, with a bounce in exports and solid consumption growth. While the Bank’s Business Outlook Survey suggests acute labour shortages are starting to ease, wage growth is still elevated relative to productivity growth. Strong population gains are adding to labour supply and supporting employment growth while also boosting aggregate consumption. Housing market activity remains subdued.

As more households renew their mortgages at higher rates and restrictive monetary policy works its way through the economy more broadly, consumption is expected to moderate this year. Softening foreign demand is expected to restrain exports and business investment. Overall, GDP growth is projected to be weak through the remainder of this year before strengthening gradually next year. This implies the economy will move into excess supply in the second half of this year. The Bank now projects Canada’s economy to grow by 1.4% this year and 1.3% in 2024 before picking up to 2.5% in 2025.

CPI inflation eased to 5.2% in February, and the Bank’s preferred measures of core inflation were just under 5%. The Bank expects CPI inflation to fall quickly to around 3% in the middle of this year and then decline more gradually to the 2% target by the end of 2024. Recent data is reinforcing Governing Council’s confidence that inflation will continue to decline in the next few months. However, getting inflation the rest of the way back to 2% could prove to be more difficult because inflation expectations are coming down slowly, service price inflation and wage growth remain elevated, and corporate pricing behaviour has yet to normalize. As it sets monetary policy, Governing Council will be particularly focused on these indicators, and the evolution of core inflation, to gauge the progress of CPI inflation back to target.

In light of its outlook for growth and inflation, Governing Council decided to maintain the policy rate at 4½%. Quantitative tightening continues to complement this restrictive stance. Governing Council continues to assess whether monetary policy is sufficiently restrictive to relieve price pressures and remains prepared to raise the policy rate further if needed to return inflation to the 2% target. The Bank remains resolute in its commitment to restoring price stability for Canadians.

Information note
The next scheduled date for announcing the overnight rate target is June 7, 2023. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR on July 12, 2023.

Source: Bank of Canada Monetary Policy Report

From the TradersCommunity News Desk