Bank of Canada holds key rate at 5%, signals it's done with hikes

The Bank of Canada held its policy rate steady for a fourth consecutive meeting and explicitly stated for the first time that it won’t need to increase it again if the economy evolves in line with its forecasts.

Policymakers led by Governor Tiff Macklem left the benchmark overnight rate unchanged at five per cent on Wednesday, a pause that was widely expected by markets and by economists in a Bloomberg survey. Officials say the data show economic growth has stalled and will remain slow in the near term, which will help bring inflation back to the bank’s two per cent target next year.

“There was a clear consensus to maintain our policy rate at five per cent,” Macklem said in his prepared opening remarks for a news conference scheduled for 10:30 a.m. Ottawa time. “What came through in the deliberations is that Governing Council’s discussion about future policy is shifting from whether monetary policy is restrictive enough to how long to maintain the current restrictive stance.”

The dovish communications suggest the bank sees a rapidly slowing economy and believes its past rate increases — 475 basis points in less than two years — are sufficient to quell inflation. That potentially opens the door to rate cuts in coming months.

“If the economy evolves broadly in line with the projection we published today, I expect future discussions will be about how long we maintain the policy rate at five per cent,” Macklem said.

The Canadian dollar tumbled after the release, erasing earlier gains to trade at US$1.3468 at 9:54 a.m. New York time. The yield on the benchmark two-year note was down about four basis points on the day to 4.006 per cent. 

The governor reiterated the need to balance the risks of over- and under-tightening, but also noted concerns about the persistence of underlying price pressures, warning that policymakers haven’t ruled out further rate increases if new developments push inflation higher. Still, the bank removed language from its previous policy statements that said it remained prepared to hike again.

Officials want to see “further and sustained easing” in core inflation and will continue to focus on the balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing activity, the bank said in its statement.

Its forecasts suggest the economy is now in “modest excess supply” and it trimmed its economic growth projection to 0.8 per cent this year, from 0.9 per cent. Still, the Bank of Canada’s base case remains a soft landing, with growth picking up around the middle of the year.

Officials expect inflation to remain close to three per cent over the first half of 2024 before declining to around 2.5 per cent by the end of the year and returning to the bank’s two per cent target next year.

The consumer price index accelerated to a 3.4 per cent yearly pace in December, and has been stuck above the 3 per cent cap of the central bank’s target operating band for 32 of the past 33 months. A closely watched measure of the Bank of Canada’s preferred core metrics also spiked.

“Over the projection horizon, ongoing excess supply in the economy continues to weigh on prices, and corporate pricing behavior and inflation expectations gradually return to normal,” the bank said in its monetary policy report.

Wage growth, which is still rising at a four per cent to five per cent yearly pace, is expected to slow, falling closer in line with inflation and modest productivity growth, the bank said.

Shelter price inflation, however, is expected to remain “elevated for some time,” with growth in mortgage interest costs seen slowing gradually as financial conditions ease and the impact of additional households renewing and taking on new mortgages decreases.

Rental price inflation, which is supported by strong demand for housing and tight supply, is forecast to moderate due to a slowdown in population growth and an expected increase in new housing construction.

A stronger-than-expected rise in house prices is one of the main risks that could drive inflation higher than expected, the bank said.

Canada’s economy is more rate-sensitive than its peers due to higher debt loads and shorter-duration mortgages. Most economists see the Bank of Canada cutting the policy rate by June, and traders in overnight swaps are placing similar bets.

Read the Bank of Canada's full statement on its rate decision

BNN Bloomberg   

The Bank of Canada held interest rates at five per cent on Wednesday. Jan 24, 2024

Read the full statement on its decision:

Bank of Canada maintains policy rate, continues quantitative tightening

The Bank of Canada today held its target for the overnight rate at 5%, with the Bank Rate at 5¼% and the deposit rate at 5%. The Bank is continuing its policy of quantitative tightening.

Global economic growth continues to slow, with inflation easing gradually across most economies. While growth in the United States has been stronger than expected, it is anticipated to slow in 2024, with weakening consumer spending and business investment. In the euro area, the economy looks to be in a mild contraction. In China, low consumer confidence and policy uncertainty will likely restrain activity. Meanwhile, oil prices are about $10 per barrel lower than was assumed in the October Monetary Policy Report (MPR). Financial conditions have eased, largely reversing the tightening that occurred last autumn.

The Bank now forecasts global GDP growth of 2½% in 2024 and 2¾% in 2025, following 2023’s 3% pace. With softer growth this year, inflation rates in most advanced economies are expected to come down slowly, reaching central bank targets in 2025.

In Canada, the economy has stalled since the middle of 2023 and growth will likely remain close to zero through the first quarter of 2024. Consumers have pulled back their spending in response to higher prices and interest rates, and business investment has contracted. With weak growth, supply has caught up with demand and the economy now looks to be operating in modest excess supply. Labour market conditions have eased, with job vacancies returning to near pre-pandemic levels and new jobs being created at a slower rate than population growth. However, wages are still rising around 4% to 5%.

Economic growth is expected to strengthen gradually around the middle of 2024. In the second half of 2024, household spending will likely pick up and exports and business investment should get a boost from recovering foreign demand. Spending by governments contributes materially to growth through the year. Overall, the Bank forecasts GDP growth of 0.8% in 2024 and 2.4% in 2025, roughly unchanged from its October projection.

CPI inflation ended the year at 3.4%. Shelter costs remain the biggest contributor to above-target inflation. The Bank expects inflation to remain close to 3% during the first half of this year before gradually easing, returning to the 2% target in 2025. While the slowdown in demand is reducing price pressures in a broader number of CPI components and corporate pricing behaviour continues to normalize, core measures of inflation are not showing sustained declines.

Given the outlook, Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet. The Council is still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation. Governing Council wants to see further and sustained easing in core inflation and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour. The Bank remains resolute in its commitment to restoring price stability for Canadians.

 

European Central Bank leaves key interest rate at a record high as focus turns to timing of cuts

David Mchugh, The Associated Press

The European Central Bank left its key interest rate untouched at a record high Thursday, keeping credit expensive for businesses and consumers as it tries to make sure inflation is firmly under control before cutting borrowing costs — a move expected later this year.

The question is, how much later this year. Financial markets are expecting a rate cut from four per cent as early as April, while ECB President Christine Lagarde has indicated it likely would happen this summer.

Analysts expect her to use a news conference Thursday to underline that the bank needs to see more proof that painful inflation — which has made everything from groceries to energy more expensive — has been beaten down.

Lagarde has cautioned that the bank will make decisions based on the latest figures about the economy’s health rather than making longer-term promises.

The ECB’s statement dropped earlier wording that “domestic price pressures remain elevated” and noted that high rates are helping push inflation down. But it cautioned borrowing costs would stay high for “as long as necessary” without offering a future timetable.

Like the ECB, Norway’s central bank kept rates steady Thursday. The same day, the central bank in Turkey, which is suffering from out-of-control inflation of nearly 65 per cent, raised its key rate to 45 per cent, expected to be the last increase for some time.

With inflation falling in major economies, financial markets are frothing in hopes of cheaper credit that would boost business activity and stock prices.

Stock investors saw their holdings, such as those in U.S. retirement accounts, soar in the last weeks of 2023 as the U.S. Federal Reserve and ECB indicated that a rapid series of rate hikes was ending. Fed Chair Jerome Powell said officials discussed prospects for rate cuts at the bank's December meeting, and the U.S. central bank has indicated it would cut its key interest rate three times this year.

The S&P 500, a broad measure of U.S. large company shares, has hit record highs this week, and European indexes also have risen. The global stock rally faces questions about whether gains can continue.

Rate cuts make riskier investments like stocks more attractive than safer bets like money market accounts and certificates of deposit. They also stimulate business activity and thus prospects for share prices to go higher.

Expectations for rate cuts have been fueled by the rapid drop of inflation in Europe to 2.9 per cent in December from the peak of 10.6 per cent in October 2022. In a little over a year, the ECB raised its key rate from negative levels — which made it cheap to borrow money to buy a house or invest in a business — to a record-high four per cent.

While rate hikes are a central bank's chief weapon to snuff out inflation, they also can slow the economy — which has been seen in Europe and countries around the world, feeding expectations for cuts now that inflation has dropped closer to preferred levels.

The economy of the 20 European Union member countries that share the euro currency, where the ECB sets interest rates, shrank slightly in the July-to-September quarter of last year. Expectations are no better for the following months.

The economic squeeze follows a surge of inflation fueled by a supply chain crunch during the COVID-19 pandemic and then higher food and energy prices tied to Russia's war in Ukraine. The worst of the energy costs and supply problems have eased, but inflation has spread through the economy as workers push for higher wages to keep up with the boost in prices they're paying.

Analysts say there are good reasons for the ECB to move cautiously. For one, having to reverse course and raise rates if inflation doesn't keep falling — or spikes again — would only prolong the pain from tighter credit.

Another is the speed of pay raises for Europe's workers. ECB officials have indicated that they want to see figures for wage increases for the first months of this year before deciding where they think inflation is headed.

“Lagarde will likely keep the door wide open for a first cut in June without fully committing to it,” according to analysts at Berenberg bank. “By emphasizing the need for more data on inflation dynamics in early 2024, she may push back gently against market expectations for a first rate cut in April.”

Additionally, attacks by Yemen's Houthi rebels on ships in the Red Sea have forced many vessels bringing consumer goods and energy supplies to Europe to avoid the Suez Canal and take a longer journey around the tip of Africa.

The disruption has so far not led to higher oil prices but has added to shipping costs for companies and underlined uncertainty about energy supplies and whether businesses could pass along higher expenses to consumers that would fuel a new round of inflation.