The Bank of Canada has become the first major central bank to halt interest rate rises, as it announced that the cost of borrowing will remain at 4.50%.
The Bank of Canada announced no rate hike at its policy meeting yesterday. This move that comes after eight consecutive rate increases which began a year ago, when rates were at a far lower 0.25%.
At the last rate meeting on 25 January, the Bank’s Governing Council stated that it expected to “hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases”.
It seems that recent interest rate increases have finally taken their toll on progress in the Canadian economy, as growth came in at a flat 0% for the final quarter of last year.
This was lower than what the Bank had previously projected.
A sizeable slowdown in inventory investment was blamed for the unexpected slowdown, as consumption, government spending and net exports all have been increasing, the Bank said.
An increasingly tight monetary policy throughout last year put the brakes on household spending, while business investment has also fallen.
Yet there has been some positive news as preliminary data compiled from Statistics Canada for January found that GDP had climbed by 0.3%.
It was a far better outcome than what was seen in December, where there had been a 0.1% economic contraction.
Globally, the Bank noted that growth was continuing to slow, but due to falling energy prices, inflation has been coming down yet remains too high.
The United States and Europe can look forward to near-term rises in growth compared to what has been anticipated, but prices are forecast to rise at the same time.
As China’s economy has rebounded in the first quarter of this year, alongside the continuing impact of the Ukraine conflict, there remain considerable risks to the global economy.
It is unlikely that there will be many raised eyebrows amongst analysts over the Bank’s decision to keep interest rates unchanged.
In a study carried out by Bloomberg involving 22 banks, all of them unanimously said that interest rates would stay the same.
However, ING has predicted that there will a change in course, with the Bank of Canada choosing a rate cut in the fourth quarter of this year.
It is a consequence of the Canadian economy having to adjust to more interest rate rises than other economies have had to withstand, after a cumulative 4.25% surge in interest rates over the course of eight Bank meetings.
Annualized inflation has slowed down for the third successive month the Bank said.
In the year up to January 2023, prices dropped to the 5.9% mark, down from 6.3% in December.
This will come as good news for Canadian consumers, as there were lower prices recorded for energy, durable goods, and services, although this was offset by hikes in food and shelter costs.
The Bank is concerned over the increasingly tight labor market, as it has been surprised by the level of employment growth while unemployment is at near historic lows.
Wages have grown from 4% to 5%, potentially adding to the higher inflation problem. Yet with expected weak economic growth for the next couple of quarters, product and labor market pressures are also expected to ease.
Overall, the Bank believes that Canadian inflation will fall to around the 3% mark in the middle of this year.
Core inflation, prices that do not include food and energy, has ticked down to around 5% the Bank revealed.
Alongside the short-term inflation outlook, it will need to come down to meet the government’s 2% target.
The Canadian benchmark stock market index, the S&P/TSX, has risen by 0.58% and was trading at 20,393 in the aftermath of the rate decision.
Despite the belief that the economy is to grow at a fragile pace in the short term, the markets are happier for now that there is no more continuation of rate hiking.
The Canadian Dollar has weakened since the release, as it has become obvious the Bank is taking a more dovish approach. The USD/CAD currency pair reached a new 4-month high following the Bank’s release.