BOC Keeps Rates Steady, Sees Risks
The Bank of Canada decided to keep interest rates unchanged due to concerns about the impact of rising interest rates on the Canadian housing market. With housing prices getting hit badly, policymakers led by Governor Tiff Macklem made the first pause among major central banks in nine meetings. The bank’s communications highlighted a “very tight” labuor market, and policymakers reiterated that they are willing to raise borrowing costs again if necessary.
The bank is confident that its aggressive tightening over the past year will keep dragging on economic growth and bring inflation under control. The latest data remain “in line with the bank’s expectation that CPI inflation will come down to around 3% in the middle of this year,” policymakers said in a statement. The bank’s decision was expected by both markets and economists, and the door remains open to further rate increases.
The bank’s pause suggests that officials are prepared to wait and see how the economy evolves before making any further moves. Domestic data has been mixed since the pause was announced, with output stalling at the end of last year as businesses pared down inventories. However, a rebound in consumption and household spending points to resilience among Canadian consumers, despite their large debts.
The bank’s decision comes as the US Federal Reserve signals further hikes to come. This divergence is expected to start testing Macklem’s resolve, with economists saying the Bank of Canada can only comfortably lag the policy rate of its powerful neighbor by about 100 basis points. Wednesday’s statement removed reference to a stable Canadian currency, replacing it with an acknowledgment of recent US dollar strength.
For some analysts, the lack of specific language on a pause suggests that the Bank of Canada may be ready to leave the sidelines and start hiking as early as April.