(Bloomberg) -- The Bank of Canada held interest rates steady for a third consecutive meeting, acknowledging a stalled economy while keeping the door open to further hikes as officials watch for more progress on slowing inflation.
Policymakers led by Governor Tiff Macklem left the benchmark overnight rate unchanged at 5% on Wednesday, the highest level in 22 years. The pause was expected by markets and by economists in a Bloomberg survey.
Officials say recent data suggest the economy is no longer in “excess demand” and their hiking campaign is dampening spending and price pressures. They eliminated a line from the October decision that said inflationary risks have increased, but said they’re prepared to raise borrowing costs again if necessary.
Despite that threat, most economists agree the Bank of Canada is finished hiking. Wednesday’s decision underscores the communication challenge policymakers face in 2024. The economy is clearly deteriorating and unemployment is rising, but Macklem and his rate-setting council don’t want to ignite speculation about deep rate cuts — which would ease financial conditions, stoke the housing market and make their inflation-fighting job more difficult.
“The bank’s nod to broader progress against inflation and the fact that the economy is no longer clearly overheated suggest that the central bank isn’t at this point really giving much thought to additional tightening,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, wrote in a report to investors.
Still, the statement shows officials remain focused on upside risks to inflation, and want to see core inflation measures move lower and stay there.
“Governing council is still concerned about the risks to the outlook for inflation and remains prepared to raise the policy rate further if needed,” the bank said, adding that they want to see “further and sustained easing in core inflation.”
After Wednesday’s decision, traders in overnight swaps were betting the bank would start cutting borrowing costs by the April meeting and lower the benchmark overnight rate to 4% by the end of 2024, little changed from before the release.
Bonds rallied, with the yield on the benchmark two-year note at 4.06% in early afternoon trading and the 10-year around 3.27%. The Canadian dollar initially rose against the US dollar after the decision, then reversed those gains.
Read More: Bank of Canada Rate Decision: Side-by-Side Comparison
Canada’s economy has stalled and consumption is weak. The unemployment rate has risen to 5.8% from 5% in just seven months, a loosening of the labor market that typically coincides with recessions. Just six weeks ago, the bank said the labor market remained “on the tight side,” but acknowledged on Wednesday they see it loosening.
After temporarily reversing course due to rising gasoline costs, inflation decelerated to a 3.1% yearly pace in October. “The slowdown in the economy is reducing inflationary pressures in a broadening range of goods and services prices,” the bank said.
Deputy Governor Toni Gravelle will expand on the central bank’s thinking on Thursday, when he is set to deliver a speech and take questions from reporters.
What Bloomberg Economics Says
“We see the effects of tight monetary policy in declining fixed investment and softening consumption growth. Due to slowing private economic activity, headline inflation will likely fall within the central bank’s 1.0%-3.0% target range in coming months.”
—Stuart Paul, US and Canada economist
For the full analysis, click here
While most economists believe a soft landing is still the base-case scenario for the economy, key vulnerabilities in the country’s financial system are about to be tested. Canada’s highly indebted households carry shorter-duration mortgages that roll over more quickly than their counterparts in the US, and 82% of economists say that represents a major downside risk to the economy.
Prematurely declaring victory over inflation, only to have to restart rate hikes later, would be a knock to the central bank’s credibility. Headline inflation has been above the Bank of Canada’s 1% to 3% control range for 30 of the last 31 months — the worst record in the modern era of the central bank — and more than half of economists surveyed by Bloomberg say that has hurt the bank’s reputation.
(Updates with more analysis, Bloomberg Economics commentary.)
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