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Bank of Canada Holds Benchmark Rate!

Bank of Canada Rate Change

The Bank of Canada has held its key interest rate steady at 4.5%, but remains prepared to raise rates depending on inflation and the economy's progress.
The Bank of Canada has held its key interest rate steady at 4.5%, but remains prepared to raise rates depending on inflation and the economy's progress.

The Bank of Canada has decided to keep its key interest rate unchanged at 4.50% but remains prepared to increase rates depending on how the Canadian economy and inflation progress.

Most economists correctly predicted that there would be no change this time, even after eight consecutive increases that saw the rate rise by 425 basis points.

Are we out of the woods?

Canada’s most current annual inflation rate is down to 5.9% from 8.1% as of January, and shorter-term measures of core inflation are heading in the right direction, which aligns with the Bank of Canada’s latest economic data that forecasts inflation to return to around 3% by mid-2023, which is good news!

The Bank noted that weak economic growth in the quarters ahead should reduce demand in the economy, driving down prices. Higher interest rates are working to discourage household spending, slow the economy and ease inflationary pressures.

However, there are still risks to the inflation outlook that could drive price pressures higher and warrant another interest rate increase.

The country’s tight labour market and employment growth are significant sources of uncertainty in its inflation forecast. In contrast, global factors like Russia’s war in Ukraine and rebounding economic growth in China could drive inflation higher.

The Bank of Canada reiterated that it is prepared to increase the policy rate further to return inflation to the 2% target. Finance Minister Chrystia Freeland acknowledged that there would likely be “bumps” in the road to getting inflation back to the Bank of Canada’s target and that inflation is still too high and interest rates are high, presenting real challenges for Canadians.

Economists expect the Bank of Canada to maintain a wait-and-see approach, given that it doesn’t have enough data yet to determine whether it needs to raise rates again or if it can firmly declare a peak for the current tightening cycle.

Some economists have flagged that a wider gap between terminal rates for the US and Canadian central banks could translate to a weaker loonie amid a surging US dollar. The Bank of Canada’s next interest rate decision comes on April 12.

So we are not out of the wood quite yet, but there is room to be hopeful that there will be a return to some normal soon!

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