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Bank of Canada Holds Firm on Interest Rates to Tackle Inflation Challenges

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Robert Tavares

March 6, 2024 - 14:56 pm

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Resolute in Stability: The Bank of Canada Maintains Key Interest Rate Amid Persistent Inflation

In a decisively cautious move, the Bank of Canada has chosen to maintain the benchmark interest rate at a steady five percent in response to the current economic climate. The central bank's commitment to transparency was evident as it communicated the rationale behind this decision.

Read the full statement on the central bank’s decision.

Senior Deputy Governor Carolyn Rogers accompanied the Governor during a briefing where the officials took an uncommon opportunity to address the public directly, given that this announcement didn't coincide with the release of a Monetary Policy Report (MPR), marking a divergence from usual practice.

The officials emphasized the importance of clear communication with Canadian households, businesses, and communities regarding the central bank's actions and the underlying reasons, signifying their commitment to keeping Canadians well-informed.

The evaluation that led to this decision was grounded in recent economic developments and risks to the forecast, which were judged against projections made in January. Despite the lack of significant surprises in the interim, it has been noted that economic growth has been sluggish, with inflation showing further signs of easing. This easing has been attributed, in part, to the dampening effects of higher interest rates on demand, thereby alleviating price pressures.

However, the stickiness of inflation, which is hovering around the three percent mark, in conjunction with ongoing underlying inflationary pressures, has prompted the Governing Council to adopt a wait-and-see approach, allowing the elevated rates to continue exerting their intended influence over the economy.

With contemplation comes conviction, and in January, the Bank had grown more confident that the prevailing policy rate was sufficiently high to ensure the return of price stability. Speculation about the necessity of a rate increase had evolved into a discussion about the duration for which the current rate must be maintained to achieve desired outcomes.

Reflecting upon the present situation, the Governing Council has confirmed its belief that a five percent policy rate is appropriate for the time being. It is still premature to contemplate a reduction in the policy rate as recent data on inflation suggests that monetary policy is largely effective, with an anticipation of gradual and inconsistent progress on inflation in the future. Additionally, the Council is braced for potential upward risks to inflation and feels the need to witness further and lasting reductions in core inflation before considering any policy changes.

Before addressing inquiries, officials elucidated the state of the economy, noting the deceleration of global growth and easing inflationary forces. The U.S. economy has displayed resilience amid a universal slowdown and reduced inflation rates. Closer to home, the Canadian economy exhibited somewhat stronger growth than what was forecasted in the January MPR, yet this growth is feeble and below the potential growth rate. The latter half of 2023 saw near-stagnant growth, which facilitated the balancing of supply with demand.

The labor market has seen a gradual relaxation with employment expansion trailing behind population growth rates, fostering equilibrium in the job market. Indicators such as normalizing job vacancies, modest hiring rates, and signs of abating wage growth—which has been situated in the four to five percent range—corroborate this trend.

The Consumer Price Index (CPI) inflation softened to 2.9% in January, driven by lower energy prices, a subsiding spike in food prices, and reduced semi-durable goods prices like clothing and footwear. However, persistent and significant shelter price inflation continues to be a primary driver of overall inflation. Despite this, some core inflation metrics showed slight relief in January but stayed above the three percent benchmark on an annual and tri-monthly basis. Moreover, the proportion of CPI components accelerating beyond three percent has dipped but remains above historical averages.

Looking forward, the Bank anticipates inflation to cling to the three percent mark through mid-year before retreating in the subsequent half. Fluctuating gasoline prices are likely to continue imparting volatility to inflation figures in the near term, while sustained shelter price pressures point towards a sluggish journey back to the bank's two percent inflation target, marked by inconsistency.

The Governing Council took time to discuss the economy's exposure to risk, referencing the heightened threats to global energy prices and transportation expenses linked to geopolitical conflicts. The domestic concern is that inflation may prove more stubborn than projected. The central bank is wary of maintaining an overly restrictive monetary policy for too long, yet it is equally cautious about jeopardizing the progress made in reducing inflation.

The persistence of core inflation remains a concern for the Governing Council, which anticipates a forthcoming deceleration in these figures. The indicators for inflationary pressures previously discussed, such as demand pressures and the state of balance in the economy, are under scrutiny. The Council is on the lookout for further evidence of moderation in wage growth. Additional pertinent data on corporate pricing behavior and inflation expectations will be available before the April decision, offering more insight into the normalization of pricing increases and a continued softening of short-term inflation expectations.

In sum, the Bank of Canada awaits further verification of diminishing inflationary trends before altering its restrictive policy stance, underscoring its unwavering resolve in its pursuit of price stability—a fundamental component of shared prosperity across Canada.

With the policy briefing concluded, the Governor and the Senior Deputy Governor welcomed questions, signaling an open dialogue and continued dedication to transparency in their policy actions.