Bank of Canada Expected to Hold Interest Rates Unchanged on Wednesday

The Bank of Canada building in Ottawa in a file photo. (The Canadian Press/Sean Kilpatrick)

Economists from Canada’s major banks predict that the Bank of Canada will hold its key interest rate steady at 4.5 percent on Wednesday, as inflation in the country continues to slow.

“After announcing a conditional pause on interest rate hikes in January, the central bank is widely expected to make a second consecutive decision to hold,” said RBC economists Nathan Janzen and Carrie Freestone in a statement.

Canada’s central bank is set to announce a decision Wednesday on whether to modify its interest rate. The announcement will be accompanied by its quarterly monetary policy report, which includes updated economic projections for growth and inflation.

Between March 2022 and January 2023, the Bank of Canada (BoC) hiked its interest rates from near zero to the highest level since 2007. This qualitative tightening was done in an attempt to quell inflation in Canada, which rose to a 40-year high of 8 percent in June 2022.

In February, Canada’s annual inflation rate fell back to 5.2 percent, which was the second month in a row inflation came in lower than forecast. The BoC has said that as long as inflation continues to fall as expected, it doesn’t plan to raise interest rates further.

Economy ‘Still Running Hot’

Despite interest rate hikes, Canada’s 2023 economic growth and job numbers have been stronger than anticipated, with Canada’s real gross domestic product growing by an estimated 0.3 percent in February and 0.5 in January after contracting slightly in December.

Businesses have also continued hiring, with the economy adding 35,000 jobs in March—bringing the total number of jobs gained over the last six months to almost 350,000. The unemployment rate has held steady at 5 percent for the fourth month in a row.

Janzen and Freestone said the BoC’s decision to hold interest rates steady while the economy is “still running hot” is due to fear of weakened future economic conditions. They argued that many effects of 2022’s “aggressive” interest rate hikes have yet to be felt in Canada’s economy.

The economists also said while supply chain constraints continue to ease, concerns remain about credit and the impact of higher interest rates on customer demand, with the BoC’s Survey of Consumer Expectations suggesting that one-third of consumers intend to curb discretionary spending on travel, entertainment, and restaurants in 2023 to deal with higher costs for essential goods.

While the recent failure of several United States banks, including Silicon Valley, doesn’t pose a “direct systemic risk” to Canada’s financial sector, Janzen and Freestone said, it serves as a reminder that “aggressive interest rate increases over the last year could yet have unexpected consequences.”

“Inflation (and the broader economy) are still running too hot for the BoC to actively consider cutting interest rates, but staying on the sidelines, for now, looks like an easy decision to make,” they said.

Job Market

Scotiabank Economist Derek Holt said in a report last week that Canada’s “jobs juggernaut” is continuing to “roll onward with convincing momentum.” He said while there are future risks to the economy, the Canadian economy and job market have so far remained resilient, which “continues to counsel against expecting rate cuts anytime soon.”

Holt noted that Canadian labour productivity is still lower than in 2019, while high levels of vacancy remain in Canada’s job market despite a surge in immigration. But he said these numbers should have a “minimal effect” on what the BoC presents on Wednesday.

“The labour market remains resilient and the details reinforce expectations for much stronger GDP growth in Q1 than the BoC had forecast,” he said.

According to BMO chief economist Douglas Porter, although Canada’s economy is growing faster than anticipated, lower-than-expected inflation will convince the BoC to hold its key interest rate at 4.5 percent.

“When we combine all these things together, it certainly looks like the bank is likely to hold rates steady for now,” he said, according to the Canadian Press.