Bank of Canada Stands Pat on Interest Rate Pause

This has been a big week for allies going in separate directions from the United States. After Emmanuel Macron told China that France might have a different strategy for Taiwan than the US, Canada said “no thanks” to the Fed’s continuing campaign of interest rates hikes.

While the CPI remains above 5% in the US and Canada, the Bank of Canada reiterated this week that it has no intention of tampering with Canada’s relatively strong economy—which is expected to lead the G7 in GDP this year—by initiating new rate hikes.

Canada’s central bank said this week it will continue to chart its own course on interest rates, maintaining a pause on rate increases and the 4.50% ceiling it established on January 25 despite a continuation of rate hikes by the Federal Reserve.

However, BOC offered a nuanced signal that it could change course if inflation doesn’t decline fast enough, indicating it hasn’t abandoned a target of reducing inflation to 2%—the same target the Federal Reserve is aiming for.

“[BOC] 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,” the bank said in a news release.

In a speech after the announcement, Tiff Macklem, a Bank of Canada governor, left the door ajar to a rate hike, the Toronto Star reported.

“If monetary policy is not restrictive enough to get us all the way back to the 2% target, we are prepared to raise the policy rate further to get there,” Macklem said.

Statistics Canada reported last month that the annual rate of inflation in Canada dropped to 5.2% in February, down from a peak of 8.1% last June.

“This is good news, but it’s not job done,” Macklem said.

The bank’s statement echoed what financial analysts have been saying in the US: the last leg of getting to 2% is the hardest part.

“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 behavior has yet to normalize,” the bank said.

BOC also raised a caution flag about the speed of growth in Canada’s economy, which could reignite inflation.

“Demand is still exceeding supply and the labor market remains tight. Economic growth in the first quarter looks to be stronger than was projected in January,” the bank said.

In other words, the economy is running hotter than BOC wants it to.

Last March, BOC launched eight consecutive rate increases that brought Canada’s overnight rate up to 4.5% from 0.25%. When the final increase of 25 bps was announced in January, it came with a statement from Macklem disclosing that BOC was initiating a pause in rate increases.