The Bank of Canada left its benchmark interest rate at five per cent on Wednesday, while signalling further rate hikes are largely off the table amid a slowing economy.
However, Governor Tiff Macklem says he needs “more assurance” that inflation is losing steam before the central bank will consider easing monetary policy.
“We know Canadians want to see interest rates come down. So do we,” he said at a press conference in Ottawa. “We want to be convinced we’re on a path back to two per cent inflation. When we have more assurance that we’re on that path, we can start discussing lowering interest rates. But we’re not there yet.”
The Bank of Canada’s inflation target sits in the middle of a range from one to three per cent. The Consumer Price Index rose to 3.4 per cent year-over-year in December, according to Statistics Canada.
The Bank remains concerned about risks to the outlook for prices, particularly the stubbornness of core inflation measures. It expects economic growth is likely to remain below one per cent through the first quarter of 2024.
“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,” it said.
The Bank removed language from its previous rate decision that said it was prepared to increase rates if needed. However, Macklem noted a hike is not unfathomable.
“The risk of a rate hike is not zero,” he said. “If we saw inflation going back up, and we thought that was going to be durable, (then) yes, we probably have to raise rates further.”
Wednesday’s decision was widely expected by economists. It marks the fourth consecutive hold by the central bank.
‘A dovish tilt’
CIBC chief economist Avery Shenfeld says the Bank has “dangled some hints that lower rates are on the way later this year,” with economic growth expected to pick up in the back half of 2024.
“The statement dropped the earlier reference to a potential need to hike if inflation failed to cool, changing it into a less hawkish comment that they remain ‘concerned’ about persistent core inflation,” Shenfeld wrote in a note to clients. “That’s a dovish tilt, but is still consistent with our call for a first rate cut in June, with as much as 150 bps of cuts on tap this year.”
Stephen Brown, deputy chief North America economist for Capital Economics, wrote in a research note: “We continue to think that the Bank’s forecasts for the economy are too optimistic, and that inflation will slow faster than the Bank expects, leading us to forecast the first rate cut in April.”
Normalization of price trends
The Bank of Canada says consumers continue to reduce spending due to higher prices and interest rates, noting business investment has slowed as well. Meanwhile, job vacancies are nearing pre-pandemic levels.
Last week, the Bank’s business outlook survey showed company “pricing behaviour is slowly returning to normal” as higher rates take effect. That report also flagged “less favourable business conditions” as “high interest rates have negatively impacted a majority of firms.”
Macklem and senior deputy governor Carolyn Rogers held a press conference about the rate decision Wednesday morning. The decision is the first under the Bank’s new communications plan announced in December. It says it will hold a press conference after every rate announcement.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.