First time Canada’s central bank has decided not to hike in a year. The Bank of Canada decided Wednesday to keep its trend-setting interest rate right where it is, at 4.5 per cent.
It’s the first time in more than a year that the central bank has decided not to raise its interest rate.
Although it will come as encouraging news to borrowers, the move was widely expected, as the bank signalled at its previous policy meeting and in statements since then that it was leaning toward keeping its rate steady.
The bank feels confident in standing pat because there is growing evidence that sky-high inflation is starting to ease.
The bank noted recent data suggesting Canada’s economy didn’t expand at all in the last three months of 2022, and household spending and business investment are both starting to slow in response to the bank’s previous rate hikes.
That’s a sign that the bank’s campaign to wrestle inflation into submission is working, but the bank made it clear in its statement that it is prepared to raise rates even higher than they are, should circumstances change.
The best-case scenario for the bank is that it is able to stand on the sidelines while inflation slowly eases from here. But it may be forced to change that plan because of things beyond its control.
A major factor is what’s happening in the United States, where the central bank is making it clear that it has no intention of holding the line on interest rates.
Currently, the U.S. central bank rate is slightly higher than Canada’s, at 4.75 per cent. But while the messaging out of Canada has been hinting that rates will hold steady for a while, the tone out of the U.S. has been that more hikes are coming.
Investors are expecting as many as two more rate hikes by June, moves that would bring the U.S. rate to 5.5 per cent — a full percentage point higher than Canada’s. If a gap that wide comes to pass, it would strongly push down the value of Canada’s dollar, which would make the Bank of Canada’s inflation fight much harder.
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Evans, Pete. “Bank of Canada Holds Interest Rate Steady | CBC News.” CBCnews, CBC/Radio Canada, 8 Mar. 2023, https://www.cbc.ca/news/business/bank-of-canada-decision-1.6771702.