The Bank of Canada is set to make its next interest rate announcement on Wednesday and while it is expected the key lending rate will remain unchanged, economists will be scrutinizing the statement that follows for any indications of the bank’s plans for the rest of the year.
Since last March, the central bank has raised its key rate from near-zero to 4.5 per cent, the highest it’s been since 2007.
While announcing its eighth consecutive rate hike in January, the Bank of Canada said it would take a conditional pause to allow the economy time to react to higher borrowing costs.
It stressed the pause was conditional, however, making it clear that it’ll be ready to jump back in and raise interest rates further if the economy keeps running hot or inflation doesn’t come down quickly enough.
“They wouldn’t want to announce a pause and then immediately not go through with (it),” said Karyne Charbonneau, CIBC’s executive director of economics.
Given the Bank of Canada’s last rate hike was just over a month ago, Charbonneau said the full effects on the economy will be felt “much later this year.”
The most recent inflation data suggests the country is inching closer to normal price growth. Canada’s annual inflation rate slowed to 5.9 per cent in January, down from the peak of 8.1 per cent reached in the summer.
And recent monthly trends show inflation is heading much closer to the Bank of Canada’s two per cent target.
With interest rates now at a 16-year high, most economists anticipate a mild recession sometime this year.
But despite these forecasts, Charbonneau said the risks are still tilted toward interest rates not being high enough, making rate hikes more likely than cuts for the foreseeable future.
