The key rate, which influences interest rates in the country, remained unchanged at 5% on Wednesday. Even though the economy and inflation are slowing, the Bank of Canada is not signaling that it is ready to lower its key rate any time soon. She even remains open to increasing it again if necessary.
The last increase in the country’s key rate dates back to last July. This then increased from 4.75% to 5% – a tenth increase in just 18 months. It has remained at the same level since.
So far, monetary policy is working, judges the Bank of Canada. The economy contracted in the third quarter, higher interest rates “clearly slowed down” spending and the unemployment rate “rose a little”, notes the institution in a press release released on Wednesday.
Everything seems to indicate that “the economy is no longer in a situation of excess demand”, decides the central bank, emphasizing that “the slowdown in the economy is reducing inflationary pressures for a growing range of goods and services”.
However, the institution does not want to declare victory too quickly. Its board of directors still says it is “concerned about the risks surrounding the inflation outlook and remains ready to increase the key rate again if necessary”.
When will there be a rate cut?
It is obviously still too early to talk about an upcoming rate cut to the liking of the Bank of Canada, which did not mention such a prospect in its Wednesday press release.
Even if the institution continues to say that it could increase them further, this should not be necessary, judged Nathan Janzen and Claire Fan, of the Royal Bank of Canada (RBC), in a recent analysis.
The two economists believe that the debate, at present, is no longer so much about whether further increases will be required, but rather about how long it will take before the Bank of Canada begins to lower its rates.
The institution “will not rush” to do so, believe RBC economists, who estimate that rates should remain stable throughout the first half of 2024, before decreasing from the third quarter.
Desjardins economists think this will happen a little sooner, and are banking on a rate cut as early as the second quarter of 2024.
Not a surprise
The Bank of Canada’s decision this Wednesday is not a surprise. A stabilization of the key rate was widely anticipated by experts.
In particular, economist Randall Bartlett, of Desjardins, analyzed that “the weakness” of the labor market, the slowdown in underlying inflation and the contraction of real GDP by 1.1% in the third quarter “should encourage the Bank of Canada not to touch the key rate”.
As a reminder, with the muscular monetary policy it has pursued over the past two years, the central bank is seeking to cool the economy in order to curb price growth in the country. It wants to bring inflation — measured by the change in the Consumer Price Index — to the middle of its target range of 1% to 3%.
Last October, inflation stood at 3.1% on an annual basis in Canada, well below the peak of 8.1% reached in June 2022, but still above the target of 2 % that the Bank of Canada is targeting.
The next announcement on the key rate will take place on January 24. The central bank will publish its report on monetary policy on the same day.