MNI:BOC Signals Willingness To Diverge From G7 With Rate Pause

The Bank of Canada signaled Thursday that policymakers are willing to diverge from more hawkish G7 peers with a plan to stop raising interest rates, saying domestic inflation is lower and on track to return to target, while making no reference to any potential weakness in Canada's dollar as as result. 

"As global inflationary pressures continue to recede, each country will need to chart its own course to get back to price stability," Senior Deputy Carolyn Rogers said in the text of a speech she's giving in Winnipeg, Manitoba. "We must tailor our policy to Canadian circumstances. And monetary policy needs to be forward-looking."

The Bank on Wednesday held its key rate at 4.5% after eight previous increases and underlined it's finished hiking unless inflation remains stubborn, while predicting consumer price gains will slow to 3% by midyear from about 6% now. Rogers said inflation pressures are unwinding after being pushed up globally by Covid and the Ukraine invasion, and Canada's 425bps of rate hikes are slowing an economy that was overheating. Canada's CPI is second-slowest in the G7 after Japan even amid some of the strongest GDP and job growth in the group since the pandemic, she said.

Inflation remains too high in Canada and "we still have a long way to go," Rogers said, reiterating the January forecast that CPI returns to the Bank's 2% target sometime next year. "With inflation still well above our target, we’re still more worried about upside risks," she said.

Upside risks include the potential for more inflation pressure from Canada's major trade partners and wage growth that appears out of line with the country's weak productivity, Rogers said. Service prices also need to weaken further beyond recent signs they have leveled off, she said.

"Looking at the data since January, Governing Council found a mixed picture. Overall, though, things are unfolding broadly in line with our outlook," she said. "If economic developments unfold as we projected and inflation comes down as quickly as we forecast in the January Monetary Policy Report (MPR), then we shouldn’t need to raise rates further. But if evidence accumulates suggesting inflation may not decline in line with our forecast, we’re prepared to do more."

Canada's dollar has weakened this year against its U.S. counterpart as investors saw the Federal Reserve planning more rate increases than Canada, and the currency could depreciate further as the Fed follows through. Deputy Paul Beaudry said in a recent speech the currency could also strengthen over time if investors see inflation coming down faster in Canada. Most investors say the Bank could leave rates unchanged for the rest of the year.