MNI BOC WATCH:Key Rate Stays 4.5%, Pause Affirmed As CPI Slows

Canada’s central bank kept its key lending rate at 4.5% on Wednesday, the highest since 2007, and policymakers underlined their eight previous increases are likely enough to bring inflation back to target.

“At its January decision, the Governing Council indicated that it expected to hold the policy interest rate at its current level, conditional on economic developments evolving broadly in line with the MPR outlook. Based on its assessment of recent data, Governing Council decided to maintain the policy rate,” policymakers led by Governor Tiff Macklem said in a statement. "Governing Council will continue to assess economic developments and the impact of past interest rate increases, and is prepared to increase the policy rate further if needed to return inflation to the 2% target."

Much of the one-page decision discussed how the global and domestic economies are moving in line with the Bank's January projections. Policymakers on Wednesday affirmed their confidence inflation will slow to around 3% by mid-year from the current pace of about 6% and last June's peak around 8%. The statement also balanced stalled first-quarter economic output hit by inventory draw-downs against robust job gains, saying overall the economy faces several quarters of weak growth as higher rates curb consumer spending and investment. 

Officials twice called their policy "restrictive," even as the key lending rate lags inflation and some measures of household price expectations over the next year or two. The Bank of Canada is moving to the sidelines as Fed and ECB officials crank up rhetoric about the need for more rate hikes to subdue inflation, which central bankers during the upswing argued was a global and not a local phenomenon.

While Canada's dollar could keep weakening if the Bank lags expected Fed hikes, Deputy Paul Beaudry said in a recent speech the currency could also strengthen over time if investors see inflation coming down faster in Canada. The Bank's statement Wednesday simply said in a paragraph about the global economy that the U.S. dollar has strengthened since January. 

The Bank didn't mention on Wednesday its earlier forecast that CPI will return to 2% in 2024, a figure it's likely to update at its next full forecast in April. The Bank sets interest rates to keep inflation in the middle of a 1%-3% band and return to target within two years, and price gains have already topped 2% since March of 2021. Governor Macklem hiked rates eight times over the last year starting from a record low 0.25%, the toughest campaign since it adopted fixed announcement dates in 2000.

All 22 economists surveyed by MNI predicted the rate hold, and most saw no reason to alter the language from the last decision about a likely pause.