Bank of Canada Maintains Interest Rates, Considers Future Rate Reduction

The Bank of Canada announced on Wednesday that it will keep its key interest rate at 5%, with Governor Tiff Macklem stating that discussions within the central bank are now focused on the timing of a future rate reduction. The bank remains concerned about the risks surrounding inflation, particularly underlying inflation, and the potential impact of current geopolitical tensions on prices and supply chains.

Economists anticipated the decision to maintain the status quo, but were interested to see if the bank would shift towards considering rate cuts. While Macklem acknowledged that the bank does not rule out further rate hikes if inflation does not cooperate, he noted that progress has been made.

The Bank of Canada expects inflation to remain around 3% in the first half of 2024, gradually decreasing to the target of 2% by 2025. However, macroeconomic indicators suggest that the Canadian economy has stagnated since mid-2023, and consumer spending has decreased in response to rising prices and interest rates. Business investments have also contracted.

The central bank projects that economic growth will gradually pick up in the second half of 2024, as household spending strengthens and foreign demand boosts exports and business investments. The bank’s next decision on the key interest rate will be announced on March 6.

Economist Jimmy Jean from Desjardins cautioned that the timing of a rate cut remains uncertain, and the bank’s upcoming monetary policy report could influence his outlook. Brooke Thackray, research analyst at Horizons ETFs, suggested that a negative fourth-quarter GDP growth rate could prompt an earlier rate reduction. The fourth-quarter GDP report is expected on February 29, 2024.

Last month, employment figures remained relatively stable, according to Statistics Canada, while Quebec’s GDP contracted for a second consecutive quarter.

The Bank of Canada also confirmed that its next full economic and inflation projection, along with a risk analysis, will be released in its report on April 10, 2024.