Bank of Canada Holds Key Interest Rate at 5 Percent

Bank of Canada Maintains Key Interest Rate at 5 Percent

April 10, 2024 TruthUSA

The Bank of Canada is keeping its benchmark interest rate at 5 percent for the sixth straight time since July, stating the need for sustained evidence of “downward momentum” in inflation before considering rate cuts.

Although inflation remains high and risks persist, the central bank indicated it has started to observe the economic conditions necessary to support a reduction in interest rates.

Economic data since the start of the year has strengthened the bank’s belief that inflation will continue to slow despite a growing economy, as stated by Bank of Canada Governor Tiff Macklem.

“I understand that most Canadians are eager to know when we will lower our policy interest rate,” Mr. Macklem stated in an April 10 address. “What do we need to see to be convinced it’s time to cut? The simple answer is we are seeing what we need, but we require more evidence to be confident in sustained progress towards price stability.”

He noted the recent drop in core inflation, emphasizing the need for assurance that this is not just a temporary decline.

The central bank anticipates a gradual easing of core inflation, yet with rising gas prices, the consumer price index (CPI) is likely to hover around 3 percent in the coming months, according to Mr. Macklem.

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The central bank’s decision to maintain its key rate comes as no surprise to economists who widely anticipate a rate cut at the Bank of Canada’s upcoming policy announcement this summer.

Bank of Montreal managing director Benjamin Reitzes noted that while the central bank opted to keep interest rates at 5 percent, it exhibited a slightly more dovish tone by highlighting core inflation trends and the softening labor market.

“While June remains a possibility, the forthcoming CPI reports must match or exceed what we saw in January and February,” Mr. Reitzes mentioned in his statement to investors. “With the Fed seemingly delaying any potential actions after strong CPI readings, the BoC is likely to tread cautiously on the timing of rate cuts.”

TD director and senior economist James Orlando is forecasting a rate reduction in July.

“Even though inflation has fluctuated within the BoC’s 1 to 3 percent range in recent months, market sentiment has turned more cautious regarding the timing of cuts,” Mr. Orlando stated in his analysis.

“Should economic growth weaken further and inflation follow its current trajectory, the BoC might prepare markets for imminent cuts.”

The Bank of Canada, continuing its quantitative tightening policy, has also released its quarterly monetary policy report. The report alludes to an increased chance of a “soft landing,” where inflation slows without a significant economic downturn.

Economic growth is expected to outperform previous estimates this year, with the central bank predicting a 1.5 percent growth in 2024 and around 2 percent in 2025 and 2026.

“Strong population growth is boosting consumer demand and the labor force supply, with household spending projected to recover throughout the year,” Mr. Macklem stated. “Government spending also contributes to growth, and the US economic strength supports Canadian exports. The improving economy will progressively absorb excess supply through 2025 and beyond.”

Global growth forecasts have been raised to 2.8 percent for the current year.

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