The Bank of Canada’s key rate, which influences interest rates in the country, was left unchanged at 5% on Wednesday. The institution suggests that the rate increases are over and is now wondering how long the stabilization phase will have to last. The governor of the institution, Tiff Mackem, however, refused to give a time horizon for a rate cut. It is still “premature”, he believes, while he wants to see inflation continue to fall sustainably.
“The board of directors’ discussions on the direction of monetary policy are no longer aimed so much at determining whether rates are restrictive enough, but rather at how long they must be maintained at the current level,” underlined Tiff Macklem, at a conference of press, accompanied by Deputy Governor Carolyn Rogers. It is still too early, says Mr. Macklem, to talk about a rate cut, because the Bank of Canada wants to see more progress on the inflation front.
This is the fourth time in a row that the Bank of Canada has maintained the key rate at its current level. The last increase in the key rate dates back to last July. She then raised it by a quarter of a percentage point, to bring it to 5%. Since then, on three occasions — in September, October and December — she had left it unchanged.
Inflation “still too high”
The recovery in monetary policy, intended to tame inflation, has borne fruit in recent months. However, inflation, measured by Statistics Canada’s Consumer Price Index (CPI), is “still too high”, estimates the Bank of Canada in its January monetary policy report.
However, she welcomes its gradual decline, as the CPI approaches the Bank of Canada’s target range, which is 1% to 3%. According to the latest CPI data, last December it was up 3.4% compared to the same period a year earlier. This is well below its peak of 8.1% recorded in June 2022.
According to Bank of Canada projections, inflation should remain around 3% throughout the first half of 2024. Then, it should start to fall to 2.5% in the second half of the year, before decrease to 2% in 2025.
When will there be a rate cut?
Several analysts expect a first rate cut this year. Jimmy Jean, chief economist at Desjardins, believes that the Bank of Canada could announce one as early as April. In a newsletter sent at the beginning of the week, the Desjardins team notes that “the Canadian bond market estimates the chances of a first rate cut as early as 60% as early as April.” She adds that, although this scenario fits with her forecasts, it “does not meet with unanimity within the economic community”.
The economists at Laurentian Bank Securities, for example, are instead counting on an initial decline from the month of June, according to a recent analysis.
The next announcement on the key rate will take place on March 6. The next report on monetary policy will be revealed during a subsequent announcement on April 10.