Bank of Canada signals likely pause in tightening after latest interest rate rise

Canada’s central bank has raised interest rates to their highest level since 2007 and signalled a likely pause in its tightening cycle after it said it saw signs that the economy had cooled down.

The Bank of Canada on Wednesday lifted its overnight rate 0.25 percentage points to 4.5 per cent, marking the eighth consecutive meeting at which it has raised benchmark borrowing costs. In January last year, interest rates were 0.25 per cent, where they had been since the start of the pandemic in March 2020.

The BoC was the first central bank in a G10 economy to hint it was ready to pause its tightening cycle, noting in December that there had been a slowdown in domestic demand. Members of the US Federal Reserve and the European Central Bank have so far indicated that they will “stay the course” and continue to raise rates in an effort to tamp inflation.

“Economic growth has been stronger than expected and the economy remains in excess demand . . . However, there is growing evidence that restrictive monetary policy is slowing activity, especially household spending,” the BoC said in a statement on Wednesday. “[The] governing council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases.”

A majority of economists polled by Refinitiv expected the BoC to enact a quarter-point raise. Fifty-five per cent of the economists polled expected the bank to pause its monetary tightening for the remainder of 2023, while the remainder expected it to lower the overnight rate later in the year.

“The pause signal was a bit more dovish than anticipated,” Bank of Montreal economist Benjamin Reitzes wrote after the decision. “While they haven’t shut the door on more hikes, the bar is quite high. It looks like March is off the table barring some wild data. April will be more definitive as we’ll have a few employment and CPI reports by then.”

Inflationary pressures have eased in Canada since its consumer price index hit a 39-year high of 8.1 per cent in June. In December, Canada’s headline inflation rate fell to 6.3 per cent, down from a 6.8 per cent annual pace in November. The price of petrol and durable goods have fallen, while grocery costs continue to increase.

“Inflation is projected to come down significantly this year,” the BoC said. “Lower energy prices, improvements in global supply conditions, and the effects of higher interest rates on demand are expected to bring CPI inflation down to around 3 per cent in the middle of this year and back to the 2 per cent target in 2024.”

The central bank will keep a close eye on Canada’s labour market, which has held up as borrowing costs have risen. The economy added 104,000 jobs in December, smashing expectations for a modest 5,000 additions. The unemployment rate fell to 5 per cent — 0.1 percentage points above its record low — and wages continue to climb. However, household spending and the property market cooled significantly in the second half of 2023.