BoC expected to hold interest rate this week, even as economy keeps some steam

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OTTAWA – The Bank of Canada is expected to hold its key interest rate steady this week as inflation continues to slow, despite other data suggesting the economy remains brisk.

The central bank is due to announce its next interest rate decision on Wednesday. This announcement will be accompanied by the updated economic forecasts for growth and inflation in the quarterly monetary policy report.

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Douglas Porter, chief economist at the Bank of Canada, said that although the economy is growing faster than expected, lower-than-expected inflation will convince the Bank of Canada to keep its key interest rate at 4.5 percent.

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“When you put all of those things together, it certainly looks like the (central) bank is more likely to keep interest rates steady for the time being,” Porter said.

For months, the economic data on which the Bank of Canada bases its interest rate decisions has been sending mixed signals about the state of the economy.

So far this year, growth and jobs numbers have come in stronger than expected, even as the Bank of Canada’s key interest rate is at its highest level since 2007.

After a slight contraction in December, real GDP grew by 0.5 percent in January. Preliminary estimates by Statistics Canada show that the economy grew again in February, by 0.3 percent.

A closer look at the economic growth numbers, says CIBC’s executive director of economics, Karen Charbonneau, shows there may not be much to worry about.

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“Some of the strength we’re seeing in GDP seems to be getting rid of some of the supply disruptions, which is actually good for inflation,” Charbonneau said.

Meanwhile, companies continue to hire. In March, the Canadian economy added 35,000 jobs, bringing the total number of jobs gained over the past six months to nearly 350,000.

The unemployment rate held steady at 5 percent for the fourth consecutive month. This is just above the all-time low of 4.9 percent reached in the summer.

While this continued strength in the economy is not necessarily what the Bank of Canada wants to see, lower inflation is good news.

In February, Canada’s annual inflation rate fell to 5.2 percent, marking the second month in a row that inflation came in lower than expected. The slowdown in headline inflation comes as supply chains recover and commodity prices moderate.

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Monthly inflation data shows that inflation is already close to the Bank of Canada’s inflation target of 2 percent.

Due to the rapid rise in prices that occurred largely in the first half of 2022, Canada’s inflation rate is expected to drop significantly in 2023, with most economists expecting it to drop to around three percent by the middle of the year.

As long as inflation continues to decline as expected, the Bank of Canada does not plan to raise interest rates further. It announced a conditional pause on rate hikes earlier this year, but has kept the door open for more rate hikes if needed.

The Bank of Canada is cautiously optimistic that its big rate hikes between March 2022 and January 2023 – which saw the key rate rise from near zero to its highest level since 2007 – will be strong enough to dampen inflation.

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The impact of higher interest rates, which can take up to two years to be fully felt in the economy, is expected to continue to expand in the economy and hamper growth.

Recent surveys by the Bank of Canada also show that consumers and businesses are preparing for a slowdown. Consumers reported plans to cut back on travel and restaurants to save money. Meanwhile, companies expect their sales to slow.

And although the labor shortage was still a major concern for businesses, the survey found signs of a slowing labor market and wage growth.

“The results of the survey show that raising interest rates is paying off,” Charbonneau said.

“I think all of this is encouraging.”

This report by The Canadian Press was first published on April 7, 2023.