Bank of Canada raised rate and announced further pause.
2023.01.25 14:15
Bank of Canada raised rate and announced further pause.
By Tiffany Smith
Budrigannews.com – The Bank of Canada became the first major central bank fighting global inflation to say it would likely hold off on further increases on Wednesday, raising its key interest rate to 4.5 percent, the highest level in 15 years.
Analysts were anticipating a 25-basis-point increase. In order to contain inflation, which peaked at 8.1% and slowed to 6.3% in December—still more than three times the bank’s target of 2%—the bank has increased rates at a record rate of 425 basis points in ten months.
According to Andrew Kelvin, chief Canada strategist at TD Securities, the members of the Governing Council “clearly have enough confidence that the tightening currently in place is already slowing the economy that they are comfortable they won’t need to raise rates further in most scenarios.”
The bank painted a picture of an economy that is going to stall and could tip into a recession during the first half of the year in its quarterly Monetary Policy Report (MPR), which includes new forecasts. This will bring inflation down to about 3% at the middle of the year and back to 2% in 2024.
Tiff Macklem, Governor of the Bank of Canada, stated to reporters, “We are turning the corner on inflation.” Although we are still a long way from our goal, recent events have strengthened our belief that inflation will decrease.”
Macklem stated that the bank would halt its policymaking in order to evaluate the cumulative effects of the current rate level. He repeated that the halt was contingent on the economy developing as anticipated.
Money markets anticipate that the Bank of Canada will reduce interest rates in October.
Macklem stated, “It’s really far too early to be talking about cuts.” The pause is actually intended to give us time to determine whether we have sufficiently raised interest rates to bring inflation back to our target level.
The December employment report highlighted the upside risk to wage and price growth, and the central bank had stated in December that future rate decisions would be based on data.
Desjardins director and head of macro strategy Royce Mendes stated, “The Bank of Canada is back to using forward guidance.” That probably means the rate-hiking cycle will stop for at least the next few months.”
“Three-month CPI inflation has fallen to about 3.5%, suggesting a significant slowdown in inflation in coming months,” the bank stated in its MPR, “even though headline inflation is still high and food and shelter cost increases are still weighing on households.”
The Canadian dollar was trading 0.3 percent lower at 1.3410 dollars, or 74.57 cents, per dollar. The yield on a two-year note fell nearly 6 basis points to 3.596%.
