BoC is expected to leave rates unchanged this week, even if economy holds steam

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OTTAWA — The Bank of Canada is expected to leave its key interest rate unchanged this week as inflation continues to slow, despite other data suggesting the economy is still growing hot.

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

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BMO chief economist Douglas Porter said that while the economy is growing faster than expected, lower-than-expected inflation should convince the Bank of Canada to keep its key interest rate at 4. ,5%.

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“When we put all of this together, it looks like the (central) bank is likely to keep rates steady for the moment,” Porter said.

For months, the economic data on which the Bank of Canada relies to make interest rate decisions has sent mixed signals about the state of the economy.

So far, growth and job numbers are growing stronger than expected, even as the Bank of Canada’s benchmark interest rate is at its highest since 2007.

After a slight decline in December, real gross domestic product increased by 0.5% in January. Statistics Canada’s preliminary estimates suggest the economy rebounded in February at a pace 0.3%.

However, CIBC’s chief economic officer, Karyne Charbonneau, said a closer look at the economic growth numbers suggests there may not be too much cause for concern.

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

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

The unemployment rate also held steady at 5% for the fourth straight month. This is higher than the all-time low of 4.9% reached in the summer.

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

In February, Canada’s annual inflation rate fell to 5.2%, marking the second straight month of lower-than-expected inflation. Inflation generally slows down as supply chains recover and commodity prices moderate.

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Monthly inflation data shows inflation is actually moving closer to the Bank of Canada’s 2% inflation target.

As rapid price increases largely occurred in the first half of 2022, Canada’s inflation rate is expected to decline significantly in 2023, with most economists forecasting the rate to fall to around 3% in the middle of the year.

As long as inflation continues to fall as expected, the Bank of Canada has no plans to raise interest rates further. It announced a pause in conditional rate hikes earlier this year, but left the door open to more rate hikes if needed.

The Bank of Canada is cautiously optimistic that the strong rate hikes from March 2022 to January 2023 — saw the prime rate rise from near zero to its highest level since 2012. 2007 — will be strong enough to quell inflation.

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The effects of higher interest rates, which can take up to two years for the economy to fully feel, are expected to continue to spill over into the economy and hamper growth.

Recent surveys by the Bank of Canada also show that consumers and businesses are bracing for a recession. Consumers say they plan to cut back on travel and dining out to save money. Meanwhile, businesses expect their sales to slow down.

And while labor shortages remain a top concern for businesses, the survey found signs of both the labor market and wage growth easing.

“The survey results really show that the rate hikes are working,” said Charbonneau.

“I think all of this is encouraging.”

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