The Bank of Canada has confirmed that the key overnight interest rate will stay at five percent, marking the fourth consecutive time the benchmark has remained unchanged. This decision aligns with the predictions of numerous economists. The last increase in interest rates by the central bank occurred in July 2023.
During a Wednesday morning press conference, Tiff Macklem, the central bank’s governor, indicated a shift in discussions at the Bank of Canada from “how high” to “how long”. The bank is now contemplating the duration of its “current restrictive stance” of a higher interest rate.
Despite the potential change in messaging, the bank has not indicated an impending decrease in interest rates due to ongoing inflation concerns. In a prepared speech, Macklem noted that inflation has been on a downward trend in recent months as the Bank of Canada’s increased interest rates have contributed to slowing the economy. However, “inflation is still too high,” he stated, highlighting the persistence of inflationary pressures. He deemed it “premature” to discuss a reduction in interest rates.
Macklem did not dismiss the possibility of additional rate increases if inflation escalates. However, he also stated that if the economy “evolves broadly in line” with current projections, he does not anticipate discussions about an interest rate hike. “I expect future discussions will be about how long we maintain the policy rate at five percent,” he said.
The inflation rate in Canada has been decreasing for most of the past year, but it rose in December. The Bank of Canada anticipates that inflation will meet its targets of approximately two percent by 2025. Regarding economic growth, some indicators suggest a slowdown towards the end of the previous year. “We don’t think we need a deep recession to get inflation back to target. But we do need this period of weak growth,” Macklem told reporters on Wednesday.
Economists from both CIBC and the Bank of Montreal responded to the announcement by forecasting a reduction in the interest rate in June 2024, with BMO stating, “Rate hikes over the past two years are doing their job.”
The central bank’s interest rate affects the debt cost for Canadians with variable-rate loans and mortgages and can also influence the interest rates on certain savings accounts. Economist Jeremy Kronick is closely monitoring mortgage rates, noting that many Canadians who secured or renewed mortgages at the lowest rates will soon need to renew or refinance at significantly higher costs.
Kronick warns that the Bank of Canada must be cautious about maintaining high interest rates for an extended period. If more Canadians face substantial increases in mortgage costs, their spending in other areas could decrease, potentially exacerbating an economic slowdown. “To the extent that people have saved and prepared for that, that’s great. To the extent that they haven’t, and there’s a pretty big sticker shock, that could push things into a worse situation than perhaps the bank expects,” said Kronick, who serves as the director of the Centre on Financial and Monetary Policy at the C.D. Howe Institute in Toronto.
Kronick anticipates a “neutral” interest rate from the Bank of Canada to be approximately three percent. He expressed uncertainty about when the bank might achieve such an interest rate, considering various factors, including the effect of geopolitical conflicts on global shipping costs.
He further cautioned that Canadians should not anticipate extremely low interest rates in the near future. “It’s going to be higher, in my view, than pre-pandemic,” he stated.
