The Bank of Canada is seen at night, Wednesday, February 21, 2024 in Ottawa. THE CANADIAN PRESS/Adrian Wyld
OTTAWA – The Bank of Canada brushed off questions about rate cuts as it held its policy rate at five per cent Wednesday, arguing inflation is still too high to justify lower borrowing costs.
Governor Tiff Macklem, who held a news conference after the interest rate announcement, acknowledged that inflation has continued to ease and the economy is weakening.
But he said underlying price pressures are still stubbornly high.
“With inflation still close to three per cent and underlying inflationary pressures persisting, the assessment of governing council is that we need to give higher rates more time to do their work,” said Macklem.
“We’ve come a long way in our fight against high inflation. But it’s still too early to loosen the restrictive policy that has gotten us this far.”
While Wednesday’s decision carried no surprises, economists are doubling down on their expectation that the first rate cut will come through in June.
Dawn Desjardins, chief economist at Deloitte Canada, said the Bank of Canada is looking for more progress on inflation before pulling the trigger, though.
“The bottom line is the economy is moving generally in the direction the bank anticipated. And inflation is not quite where they would like it to be,” she said in an interview.
Canada’s inflation rate dropped to 2.9 per cent in January, falling back within the Bank of Canada’s one-to-three per cent target range.
But the central bank notes its preferred core measures of inflation, which strip out volatility in prices, are still running between three and 3.5 per cent.
Higher interest rates have helped slow down the pace of price growth by causing a pullback in spending in the economy.
The Bank of Canada has been clear it doesn’t want to move too soon, only to have to reverse course later.
“We don’t want to keep monetary policy this restrictive for longer than we have to,” Macklem said. “But nor do we want to jeopardize the progress we’ve made in bringing inflation down.”
Economists said the central bank is in no hurry.
“The Bank of Canada … didn’t make any great leaps towards an actual rate cut today,” said CIBC chief economist Avery Shenfeld. “For now, the overall message is that it’s too early to cut, and that they need to see more progress on inflation.”
Economic conditions have given the central bank more runway, said TD’s director of economics James Orlando.
“With core rates of inflation tracking around the mid-three-per-cent level, the bank can justify waiting longer. Luckily the central bank has been gifted a little more time to wait. Economic growth eked out small, but positive, growth to end 2023,” he said.
“With effectively no pressure for the BoC to respond, it can sit back and wait for a couple more inflation reports to roll in.”
Forecasters widely expect the central bank to begin lowering interest rates around the middle of the year.
This report by The Canadian Press was first published March 6, 2024.
