Bank needs to keep options open in an economy fading from overheated to potential recession.
Governor Tiff Macklem said after December's 50bp increase he could pause and decisions are becoming more data dependent. While inflation has continued to decelerate from a peak of 8.1% in June to 6.3% in December some ex-staff have said progress is slow. (See: MNI INTERVIEW: BOC In One And Done Zone- Chamber Of Commerce) Officials have also kept their options open, saying they could be forceful again if needed.
The Bank has said it's balancing the risks of over- and under-tightening, predicting GDP will be flat in the first half of this year making a mild recession possible. Many economists say Canada won't follow the Fed's signals about hiking beyond 5% this year.
HIGHEST SINCE 2007
Canada's policy rate hasn't been 4.5% since late 2007, and going beyond that would match a high set back in 2001, when it reached 5.75%. Even a quarter-point move Wednesday would mark the longest tightening cycle since fixed meeting dates began in 2000.
The Bank's hikes from a record low 0.25% last year are restraining some parts of the economy. Mortgage interest costs jumped 18% from a year ago, the most since 1982, and the associated housing slowdown fostered a record 4.1% monthly drop in household appliance prices. The vulnerability of a nation with some of the world's frothiest housing markets to higher rates is another wild card for rates this year.
The new Monetary Policy Report may also mark down the forecast for inflation this year to around 3.25% from 4.1% in the October projection, reflecting a drop in energy prices.
INFLATION RISKS, DEBUT MINUTES
Macklem is likely to judge that he needs to maintain some hawkish language in Wednesday's statement, given inflation risks and doubt among investors after 2022 where four of the Bank's eight decisions were outside market expectations.
Source: Bank of Canada
The policy rate remains negative versus two-year consumer views of inflation, and Bank officials have said the longer inflation is elevated, the greater the risk it becomes entrenched. The Bank seeks to keep CPI in the middle of a 1%-3% band and return to target within two years. Price gains have topped 2% since March 2021.
Other reports show a tight economy, including third-quarter GDP growth at about a 3% annualized pace and the unemployment rate near a record low around 5%. Provincial governments are mailing out new relief checks that make the inflation fight harder. (See: MNI INTERVIEW: Deficit Means Little Scope For BOC Cut- Asselin)
Meeting minutes will also be published for the first time following this decision, with a delay of two weeks.