Economists expect the Bank of Canada will hold interest rates at its key policy announcement next Wednesday, but experts say the bigger question is what happens after the March meeting.

According to economists tracked by the Bloomberg terminal, experts anticipate the Canadian central bank will hold its key policy rate at 4.50 per cent.

“I don't think that the Bank of Canada will change policy at the next meeting, continuing with the conditional hold is probably their strategy for right now,” Charles St-Arnaud, chief economist at Alberta Central and a former economist at the Bank of Canada, said in a phone interview on Thursday.

In a statement at the last Bank of Canada interest rate meeting, the central bank said “If economic developments evolve broadly in line with the MPR [Monetary Policy Report] outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases.”

St-Arnaud said while inflation has fallen below economists’ estimates, some components of the Consumer Price Index (CPI) are proving to be stickier than previously expected and that’s something the Bank of Canada will have to keep an eye on.

“There are still 65 per cent of all components of CPI that are still growing at more than five per cent,” St-Arnaud explained.

“So there might be a bit more stickiness with inflation than what the Bank of Canada has previously expected, but it shouldn’t be a problem for the next few months though since at this time last year gasoline prices were much higher than they are now.”

WHAT HAPPENS NEXT

While economists are in agreement about the Bank of Canada holding rates at its March 8 meeting, Robert Kavcic, director and senior economist at BMO Capital Markets, said the real question is what happens next.

“I think like the bigger question and the bigger challenge that they're [the Bank of Canada] going to have is, ‘What happens after March?’” Kavcic said in a phone interview on Thursday.

“The U.S. Federal Reserve is probably going to be tightening at least two more times, if not more. For the Bank of Canada, if inflation remains sticky and if the economy does not break down, are they going to be able to sit there with the policy rates they have and pause as they suggested?”

Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets, said markets are already pricing in that the U.S. Federal Reserve will hike interest rates by another 100 basis points, and that’s “probably close to the limit” that the interest rate differential for Canada and the U.S. can widen to.

“That’s because if the U.S. required such drastically different interest rates than Canada, that would probably mean that the U.S. economy has very strong momentum and inflation was proving to be stickier than previously anticipated,” Mendes said in a phone interview on Thursday.

“Eventually those things can and will spill over into Canada. Even if the BoC for some reason thought those pressures were contained within the U.S., even still seeing the interest rate differential widen too much would obviously force the currency weaker, which would add some consumer price pressures in Canada.”

He said while seeing the currency weaken under these conditions wouldn’t matter normally because “that's a level shift and not a sustainable increase in inflation,” at this time of high inflation “even a one-time level shift in prices higher, that was driven by a week depreciation on the Canadian dollar, could warrant a monetary offset.”

CHANGING ECONOMIC CONDITIONS

Despite a consensus around the Bank of Canada holding rates, Dominique Lapointe, global macro strategist for the multi-asset solutions at Manulife Investment Management, said “it’s still a hard policy decision for them” since there is a lot of conflicting data points right now.

Lapointe said global growth has been better than expected and China’s economic reopening after strict COVID-related restrictions “actually continued”; however, Canadian growth was weaker in the fourth quarter and the labour market is still showing signs of strength.

'CREDIBILITY AND COMMUNICATION PROBLEM'

Regardless of the Bank of Canada’s interest rate decision next week, Kavcic said the Bank of Canada has “a bigger credibility and communications problem on their hands.”

“Remember early in the pandemic they kind of came out and pushed this guidance out onto Canadians that rates were going to stay exceptionally low for a really long period of time?” Kavcic said.

“Well, that turned out to be totally not the case; they followed that up with the biggest tightening cycle we've seen in a generation.”

Kavcic said Bank of Canada has now “explicitly told Canadians we're done raising rates now, and we’re already starting to see some of the psychology improve in housing.”

“What happens if later in the spring or summer they [BoC] come out and start tightening again? Well, that’s just going to be another knock against their communication credibility,” Kavcic said.

“They’re at a real risk of losing some credibility on the guidance front if they get this one wrong.”