The Bank of Canada has announced today that it will maintain its key overnight interest rate at five percent, marking the fourth consecutive decision to keep the benchmark rate steady. This decision comes despite ongoing discussions about the future trajectory of interest rates amidst fluctuating economic conditions.
Governor Tiff Macklem, in a press conference, emphasized a shift in the central bank’s focus from the level of interest rates to the duration of the current restrictive stance. This approach is in response to persistent inflationary pressures, despite a recent slowdown in inflation rates.
“Inflation is still too high,” Macklem stated, underscoring the bank’s cautious stance on reducing rates prematurely. While open to future rate increases if inflation escalates, Macklem indicated that discussions might soon center on the duration of maintaining the current five percent rate, provided economic conditions align with projections.
The inflation rate in Canada has seen a decline over the past year but experienced an uptick in December. The Bank of Canada anticipates achieving its two percent inflation target by 2025. Economic growth, meanwhile, has shown signs of slowing down, with Macklem acknowledging the need for a period of weak growth to stabilize inflation.
Economists from CIBC and the Bank of Montreal predict a potential rate cut in June 2024, acknowledging the effectiveness of past rate hikes. The central bank’s rate decisions influence various aspects of the economy, including variable-rate loans, mortgages, and certain savings accounts.
Jeremy Kronick, Director of the Centre on Financial and Monetary Policy at the C.D. Howe Institute, highlighted the impact of higher mortgage rates on Canadian households. Many face renewals or refinancing at higher rates, potentially leading to reduced spending and exacerbating economic slowdowns. Kronick suggests a “neutral” interest rate around three percent but acknowledges uncertainties, including geopolitical tensions affecting international shipping costs.
Canadians are advised to not expect significantly lower interest rates in the near future, as the Bank of Canada navigates the complex economic landscape.