Bank of Canada to Pause Rate Hikes as Economy Cools to "Close to Zero" in Q3

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By Ketki Saxena 

Investing.com – Speaking in Quebec City today, Bank of Canada Governor Tiff Macklem reaffirmed the “conditional pause” on interest-rate hikes previously announced at the Bank’s last monetary policy meeting. 

Mr. Macklem noted that “If new data are broadly in line with our forecast and inflation comes down as predicted, then we won’t need to raise rates further”. 

The Bank of Canada currently forecasts that CPI will fall to 3% by mid-year and back to its 2% target in 2024. AS of the latest reading in December, inflation was at 6.3%, a substantial decline from the 8.1% peak seen in June. 

Part of the reason for easing inflation has been an easing in commodity prices and the untangling of supply chain snarls. 

“Inflation is turning the corner. Monetary policy is working,” Mr.Macklem noted. 

While inflation remains above target despite the Bank of Canada’s rate hike spree, Mr. Macklem added, “Typically, we don’t see the full effects of changes in our overnight rate for 18 to 24 months”.

“In other words, we shouldn’t keep raising rates until inflation is back to two per cent.”

The central bank has lifted rates at a record pace over the last year, from 0.25% in March to its current level of 4.5%. 

Another effect of the rate hike sprees is a cooldown of excess demand in the Canadian economy, with Mr. Macklem noting that economic growth in Canada will be “close to zero” through the third quarter of this year.

He affirms however that while “That doesn’t sound like a good thing, but when the economy is overheated, it is”. 

Despite the decidedly dovish tilt to today’s comments, Mr. Macklem’s key messaging remains largely a reaffirmation of his commentary immediately following January’s interest rate hikes: the current rate will hold for now, but the Canadian central bank remains ready to raise rates further if inflation proves to be more stubborn than expected.

Yesterday,  a median of market participants surveyed by the central bank forecast borrowing costs would come down by 50 bps by year end, and fall further next year.