Bank of Canada holds rate: What the economists say

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The Bank of Canada held interest rates at 4.5 per cent for the second straight month at its April 12 meeting.

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However, economists noted that absent from its statement was the bank’s previous promise of a conditional pause on hikes.

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Instead, the bank’s governing council resurrected the possibility of a future rate increase if inflation remains stubborn.

“Governing Council continues to assess whether monetary policy is sufficiently restrictive to relieve price pressures and remains prepared to raise the policy rate further if needed to return inflation to the two per cent target. The Bank remains resolute in its commitment to restoring price stability for Canadians,” the statement said.

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Tiff Macklem, governor of the Bank of Canada, hiked rates at a pace not seen since the mid-1990s in an attempt to rein in inflation that peaked at 8.1 per cent in June. Inflation cooled in February to 5.2 per cent year over year, but remains well above the bank’s comfort zone of one to three per cent.

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The bank said in the statement it expects inflation to hit three per cent by the middle of this year, but may not cool to two per cent until the end of 2024.

Here’s what the economists are saying about rates and where the bank goes from here.

Josh Nye, RBC Economics

“We thought the policy statement and Monetary Policy Report leaned a touch hawkish, with the BoC clearly wanting to see more evidence of easing wage growth, slowing services inflation and normalization in inflation expectations to be confident that inflation will return to target on a sustained basis. Banking turmoil has erased market odds of the BoC restarting its tightening cycle, but today’s statement seems to be a reminder that the bank has a tightening, not an easing bias, and investors might be underestimating the potential for further rate hikes.

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“In fact, Governor Macklem said market pricing for cuts later this year “doesn’t look today like the most likely scenario to us.” To be clear, our base case is for the BoC to remain on hold throughout 2023, and we think its next move is more likely to be a cut (early next year, in our view) than a hike. But if economic activity doesn’t slow in the coming quarters as we and the BoC expect — moving the economy from excess demand currently to excess supply later this year — there remains potential for rates to move higher.”

Stephen Brown, Capital Economics

“The Bank of Canada delivered mixed messages today, noting that it is more confident that inflation will decline in the next few months but less confident that inflation will return to two per cent as quickly as it previously anticipated. Nonetheless, with the Bank’s forecasts for both GDP growth and inflation still looking too high to us, we continue to expect the bank’s next move to be an interest rate cut.

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“Meanwhile, the Bank trimmed its estimates for potential GDP growth in the coming years, but left its estimate of the neutral policy rate unchanged at between two per cent and three per cent. Despite lower potential GPD growth, the Bank still expects excess supply to open up in the second half of 2023 as GDP growth slows well below its full potential. We continue to see both GDP growth and core inflation slowing even faster than the Bank assumes, with a modest recession likely, leading us to think that the bank will be ready to cut interest rates in October.”

Charles St-Arnaud, Alberta Central

“The key message in today’s decision is that the Canadian economy is more resilient than previously expected and that the central bank may be less certain that rates will stay on hold for some time. As such, the statement suggests that the BoC is less certain that monetary policy is restrictive enough. As such, the removal of the conditional commitment, put in place in March, suggests that the BoC sees an increased probability that its next move could be a hike.

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“This suggests the BoC could hike later this year if underlying inflationary pressures prove stickier or if growth continues to be more resilient than expected. However, the recent banking turmoil in the U.S. and Europe is likely leading to some caution.

Today’s decision supports our view that the BoC is likely done with its tightening. However, the risks remain tilted towards another hike if inflation proves sticky and the labour market remains tight, leading to elevated wage growth.”

James Orlando, TD Economics

“The BoC held the line in today’s announcement. While it acknowledged that the economy is exhibiting cyclical strength as evidenced by strong employment gains and a bounce-back in consumer spending, it appears confident that growth is set to slow in the coming months. This slowdown, though delayed, has kept the faith that inflation will continue to decelerate, hitting three per cent year-on-year this summer.”

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Over the last couple of weeks, the timing of rate cuts has been pushed out, with markets now expecting the first cut to occur in December (from September). This reflects the economy’s cyclical rebound, which will keep underlying cyclical inflationary pressures (supercore) elevated through this year. As the BoC acknowledged, this could make “getting inflation the rest of the way back to two per cent” more difficult. Given this backdrop, we think the best policy for the BoC is to keep rates stable until cyclical inflation dynamics turn decisively lower.”

Lesley Marks, chief investment officer, equities, Mackenzie Investments

“The Bank of Canada statement had a new reference on whether monetary policy was sufficiently restrictive to relieve price pressures and restore price stability which may be perceived as hawkish. Although stronger than expected economic data makes it more challenging for the Bank of Canada to remain on hold, stress in the global banking sector is leading to tighter credit conditions and may in turn help do the work of the central bank if these conditions lead to headwinds for economic growth. The bank still expects the economy to slow through the remainder of this year, despite the upside surprise in the first quarter. And, inflation, although still above the bank’s two per cent target is declining quickly towards this target rate, also allowing the bank to stay on hold. If the economy shows the expected signs of slowing and inflation tracks lower over the coming months, we believe that the outlook for the Bank of Canada is to remain on hold for now.”

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