After eight consecutive interest rate increases, the Bank of Canada (BoC) announced on Wednesday, March 8, 2023, that it would hold its key overnight rate at 4.5 per cent. This move marks the first time in over a year that the central bank has decided not to raise its interest rate.
According to experts, the months ahead will reveal how economic indicators react to the bank’s dramatic series of hikes that began in March 2022 at a pandemic-low interest rate of 0.25 per cent. The BoC has decided to keep its trend-setting interest rate right where it is, at 4.5 per cent. This move was widely expected, as the bank signaled in its previous policy meeting and in statements since then that it was leaning toward keeping its rate steady.
Economists are watching closely for any changes in economic indicators, particularly inflation and the labor market. The BoC highlighted the still-tight labor market in its Wednesday statement on the rate decision and referenced falling inflation that, at 5.9 per cent, still sits well above the central bank’s two per cent target. Statistics Canada data on February’s employment numbers and inflation are expected in the coming weeks, and those numbers will be “relatively crucial in terms of where we go next.”
The central bank stressed on Wednesday that it is “prepared to increase the policy rate further” to get inflation down to its two per cent target. Economists who spoke with BNNBloomberg.ca said they largely expect the BoC to leave its key interest rate at 4.5 per cent in the year ahead, even as it left the door open to more tightening. CIBC chief economist Avery Shenfeld said he expects the BoC’s language about its future direction will likely become clearer in the coming months. The BoC said Wednesday that it is prepared to increase the policy rate further if needed to return to the two per cent inflation target.
While the Bank of Canada’s decision to hold interest rates steady may offer some temporary relief to borrowers, it’s uncertain how the future will unfold. Economic indicators, particularly inflation and the labor market, are still a cause for concern, and the central bank has signaled its willingness to increase interest rates further if needed. Canadians will continue to feel the pinch of higher borrowing costs in their mortgages, wages, and job prospects in 2023. Therefore, it’s important to stay vigilant and keep a close eye on economic indicators in the months ahead.
The Bank of Canada’s decision to hold interest rates steady is a sign that its campaign to wrestle inflation into submission is working. The bank is confident in keeping the current position because there is growing evidence that sky-high inflation is starting to ease. However, the bank is prepared to raise rates even higher should circumstances change. As for when the central bank will cut rates, economists have differing opinions, but most expect the key interest rate to remain unchanged through 2023 if the economy progresses as expected.
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