| Consensus | Actual | Previous | |
|---|---|---|---|
| Change | 25bp | 25bp | 50bp |
| Level | 4.50% | 4.50% | 4.25% |
Highlights
The Bank of Canada on Wednesday raised its policy interest rate -- the target for overnight lending rates -- by 25 basis points to 4.50 percent from 4.25 percent, as expected, in an eighth consecutive hike in the tightening phase that began in March aimed at bringing high inflation back to its 2 percent target.
The central bank is expected by economists to hold its policy stance steady for now after signaling last month that the phase of aggressive tightening is over and suggesting that its policy-making panel will decide whether to the bank will need to raise rates further at each meeting.
The bank is scheduled to announce its next monetary policy decision on March 8.
"With persistent excess demand putting continued upward pressure on many prices, Governing Council decided to increase the policy interest rate by a further 25 basis points," the bank said in a statement.
Bank to Hold Policy Steady If Economy Moves As Expected
"If economic developments evolve broadly in line with the MPR (Monetary Policy Report) outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases," it said.
At the same time, the bank's policymakers are trying to calm some expectations in financial markets that the BoC will ease policy later this year.
"Governing Council is prepared to increase the policy rate further if needed to return inflation to the 2 percent target, and remains resolute in its commitment to restoring price stability for Canadians," the bank said.
Governor Tiff Macklem told a news conference after the policy announcement that it is too early to discuss whether the Bank of Canada will need to consider lowering interest rates to support economic growth as it takes time to bring easing but elevated inflation back to the bank's 2 percent target.
Governor Says 'Far Too Early' To Discuss Rate Cuts
Asked about market expectations that the bank may start cutting rates in late 2023, Macklem replied,"Inflation is still 6 percent. It is far too early to talk about cuts."
In their latest forecast, BoC policymakers are"confident" that inflation will come down as global supply bottlenecks continue easing and shorter-term inflation measured in the three-month moving average shows the upward price pressure momentum is cooling, said the governor.
Asked again as to what economic conditions would entice the bank to consider rate cuts, Macklem replied,"It's too early to be talking about rate cuts."
"We are talking about a pause. We are trying to balance the risks of over- and under-tightening," he said.
Macklem stressed that it is a"conditional pause" that the bank's policymaking panel is talking about."It's conditional economic developments are coming out in line with our forecast," he said."If we need to do more, if we need to raise interest rates further to get inflation back to target, we will."
Going forward, both Macklem and Senior Deputy Governor Carolyn Rogers said they will be monitoring"accumulation of data," instead of any particular indicators, when they judge whether the economy moving in line with the bank's growth and inflation outlook.
The eight rate hikes in 11 months totaling 425 basis points have pushed up the policy rate from its record low of 0.25 percent, which had been in place for two years until March 2. The current policy rate stands well above the bank's latest estimate for the nominal neutral interest rate in a range of 2 percent to 3 percent.
The bank has far more than unwound its emergency three rate cuts totaling 150 basis points conducted in March 2020 during the first wave of the global pandemic, which lowered the policy rate to 0.25 percent from 1.75 percent, a level that had been maintained for over a year since it was raised from 1.50 percent on Oct. 24, 2018.
Quantitative tightening that began in late April is"complementing increases in the policy rate," the bank said, repeating its recent statement on unwinding emergency asset purchases that were aimed at reinforcing the effects of monetary easing during the early stage of the pandemic. The bank stopped reinvesting in government bonds and is letting its swollen balance sheet shrink in line with economic recovery from the pandemic-caused slump.
Canada Still in Excess Demand, Labor Markets Remain Tight
The bank maintained is assessment that the economy remains in excess demand, labor markets are still tight, with the unemployment rate near historic lows.
But it also noted that"there is growing evidence that restrictive monetary policy is slowing activity, especially household spending." As the effects of interest rate increases continue to work through the economy, spending on consumer services and business investment are expected to slow, the bank said.
Canadians are expected to feel the pain of an economic slowdown this year under high borrowing costs and cooling labor conditions, but it is unlikely to be a sharp recession, Macklem said. Economic growth will pick up when supply catches up with demand, he said.
Canada's housing market slowdown has been in line with the bank's expectations and the housing market is expected to come back later this year as immigration has been increasing in Canada, which supports consumption, Rogers said.
The central bank is expected by economists to hold its policy stance steady for now after signaling last month that the phase of aggressive tightening is over and suggesting that its policy-making panel will decide whether to the bank will need to raise rates further at each meeting.
The bank is scheduled to announce its next monetary policy decision on March 8.
"With persistent excess demand putting continued upward pressure on many prices, Governing Council decided to increase the policy interest rate by a further 25 basis points," the bank said in a statement.
Bank to Hold Policy Steady If Economy Moves As Expected
"If economic developments evolve broadly in line with the MPR (Monetary Policy Report) outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases," it said.
At the same time, the bank's policymakers are trying to calm some expectations in financial markets that the BoC will ease policy later this year.
"Governing Council is prepared to increase the policy rate further if needed to return inflation to the 2 percent target, and remains resolute in its commitment to restoring price stability for Canadians," the bank said.
Governor Tiff Macklem told a news conference after the policy announcement that it is too early to discuss whether the Bank of Canada will need to consider lowering interest rates to support economic growth as it takes time to bring easing but elevated inflation back to the bank's 2 percent target.
Governor Says 'Far Too Early' To Discuss Rate Cuts
Asked about market expectations that the bank may start cutting rates in late 2023, Macklem replied,"Inflation is still 6 percent. It is far too early to talk about cuts."
In their latest forecast, BoC policymakers are"confident" that inflation will come down as global supply bottlenecks continue easing and shorter-term inflation measured in the three-month moving average shows the upward price pressure momentum is cooling, said the governor.
Asked again as to what economic conditions would entice the bank to consider rate cuts, Macklem replied,"It's too early to be talking about rate cuts."
"We are talking about a pause. We are trying to balance the risks of over- and under-tightening," he said.
Macklem stressed that it is a"conditional pause" that the bank's policymaking panel is talking about."It's conditional economic developments are coming out in line with our forecast," he said."If we need to do more, if we need to raise interest rates further to get inflation back to target, we will."
Going forward, both Macklem and Senior Deputy Governor Carolyn Rogers said they will be monitoring"accumulation of data," instead of any particular indicators, when they judge whether the economy moving in line with the bank's growth and inflation outlook.
The eight rate hikes in 11 months totaling 425 basis points have pushed up the policy rate from its record low of 0.25 percent, which had been in place for two years until March 2. The current policy rate stands well above the bank's latest estimate for the nominal neutral interest rate in a range of 2 percent to 3 percent.
The bank has far more than unwound its emergency three rate cuts totaling 150 basis points conducted in March 2020 during the first wave of the global pandemic, which lowered the policy rate to 0.25 percent from 1.75 percent, a level that had been maintained for over a year since it was raised from 1.50 percent on Oct. 24, 2018.
Quantitative tightening that began in late April is"complementing increases in the policy rate," the bank said, repeating its recent statement on unwinding emergency asset purchases that were aimed at reinforcing the effects of monetary easing during the early stage of the pandemic. The bank stopped reinvesting in government bonds and is letting its swollen balance sheet shrink in line with economic recovery from the pandemic-caused slump.
Canada Still in Excess Demand, Labor Markets Remain Tight
The bank maintained is assessment that the economy remains in excess demand, labor markets are still tight, with the unemployment rate near historic lows.
But it also noted that"there is growing evidence that restrictive monetary policy is slowing activity, especially household spending." As the effects of interest rate increases continue to work through the economy, spending on consumer services and business investment are expected to slow, the bank said.
Canadians are expected to feel the pain of an economic slowdown this year under high borrowing costs and cooling labor conditions, but it is unlikely to be a sharp recession, Macklem said. Economic growth will pick up when supply catches up with demand, he said.
Canada's housing market slowdown has been in line with the bank's expectations and the housing market is expected to come back later this year as immigration has been increasing in Canada, which supports consumption, Rogers said.
Market Consensus Before Announcement
The Bank of Canada is expected raise its policy rate by 25 basis points at its January meeting, an incremental move allowing officials to assess the cumulative effects of prior credit tightening. The latest CPI data showed the annual inflation rate continued easing to 6.3 percent in December from 6.8 percent in November and a recent peak of 8.1 percent in June 2022 amid softer commodities prices, but it is still well above the bank's 2 percent target. Last month the bank raised its policy interest rate by 50 basis points to 4.25 percent in a seventh consecutive hike in the tightening phase that began in March 2022 while signaling that the phase of aggressive tightening is over.
Definition
Canada's central bank, the Bank of Canada (BoC), announces its monetary policy with regard to interest rates eight times a year. The announcement conveys to the financial markets and investors what, if any, changes in policy might be. The main focus is the target set for the overnight rate. Policy is framed around keeping the annual rate of inflation as measured by the consumer price index (CPI) within a 1 percent to 3 percent range and close to the 2 percent midpoint over the longer-run. To this end, the BoC also monitors an adjusted measure of the CPI that excludes a range of volatile categories in order to get a better handle on underlying trends.
Description
Bank of Canada determines interest rate policy at eight meetings during the year and they are an influential event for the markets. Prior to each meeting, market participants speculate about the possibility of an interest rate change. A post-meeting statement is issued after each meeting. Unlike the Federal Reserve, there are no post-meeting minutes. The Bank has an inflation target range of 1 percent to 3 percent with specific focus on the 2 percent midpoint.
Although the Bank monitors many economic indicators, as indeed all central banks do, the Bank converted its inflation barometer for operational purposes to a consumer price index measure that subtracts eight volatile components to better reflect core inflation. It also takes the foreign exchange rate for the Canadian dollar into its monetary policy decisions.
Monetary policy goals are to aid and abet solid economic growth along with rising living standards. To achieve these goals, inflation is kept low, stable, and predictable. The inflation control target is at the heart of Canadian monetary policy that the Bank and the Government have established. The level of interest rates and the exchange rate determine the monetary environment in which the Canadian economy operates.
The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.
Although the Bank monitors many economic indicators, as indeed all central banks do, the Bank converted its inflation barometer for operational purposes to a consumer price index measure that subtracts eight volatile components to better reflect core inflation. It also takes the foreign exchange rate for the Canadian dollar into its monetary policy decisions.
Monetary policy goals are to aid and abet solid economic growth along with rising living standards. To achieve these goals, inflation is kept low, stable, and predictable. The inflation control target is at the heart of Canadian monetary policy that the Bank and the Government have established. The level of interest rates and the exchange rate determine the monetary environment in which the Canadian economy operates.
The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.
