Source: AFP
The Bank of Canada on Wednesday kept its key lending rate at 5% for the fourth straight time, saying it remains concerned about stubbornly high inflation.
Despite the slowing economy, the bank said in a statement that “the board wants to see a further and sustained easing of core inflation,” curbing hopes for imminent rate cuts.
Many economists had expected it to start cutting rates as early as April or June.
The central bank began raising interest rates from a record low of 0.25% in March 2022 in a bid to tame rising inflation.
Inflation has been steadily falling from a peak of 8.2% in June 2022 — a sign that higher borrowing costs are having the desired impact.
But a small rise last month to 3.4 percent has arguably complicated the path to the bank’s desired 1-3 percent range.
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Measures of core inflation, which exclude volatile food and energy prices, meanwhile, “do not show sustained declines,” the bank said.
“The Bank of Canada is not yet ready, willing or able to ease interest rates, but it has given some indication that lower rates are on the way later this year,” CIBC Economics analyst Avery Shenfeld said in a research note.
He and others noted that the bank has dropped language from previous releases that left open the possibility of further rate hikes.
“Canada’s central bankers appear to be waving the white flag on further rate hikes,” said Desjardins analyst Royce Mendes.
Its trajectory, Shenfeld added, “has shifted from a debate about whether interest rates are high enough to one about how long it takes to keep rates at 5%.”
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He added that cuts of at least 150 basis points this year would eventually be needed “to get the economy moving again after its current stagnation.”
The central bank said global economic growth is slowing and inflation is easing in most economies.
“In Canada, the economy has stalled since mid-2023 and growth will likely remain close to zero through the first quarter of 2024,” he estimates.
Consumer spending and business investment decline and “supply has caught up with demand,” leaving only a small excess supply in the economy.
Vacancies have also returned to near pre-pandemic levels, and new job creation has slowed despite rising wages.
The bank predicted that Canadian economic growth will “gradually strengthen” around mid-2024, followed by a pick-up in household spending and exports that are likely to boost business investment.
Overall, it said it expects Canada’s economy to grow 0.8% in 2024 and 2.4% in 2025, almost unchanged from its October forecast.
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Inflation, he added, will likely remain close to 3% next year, before easing gradually in 2025.
Source: AFP