Bank of Canada holds rates, but remains hawkish by saying rates could still rise

There were no surprises with this week’s rate hold by the Bank of Canada, with some observers saying the Bank is likely to leave interest rates unchanged "for some time yet.”

As a result of Wednesday’s decision by the Bank of Canada’s Governing Council, the overnight target rate will remain at 4.50%, with prime rate still at 6.70%.

In its statement, the Bank reiterated that it "continues to assess whether monetary policy is sufficiently restrictive to relieve price pressures and remains prepared to raise the policy rate further if needed to return inflation to the 2% target.”

However, most economists and analysts see the Bank likely remaining on hold for the remainder of the year before cutting rates early in 2024.

"The BoC is comfortably on hold for the time being with inflation slowing in line with its forecast,” noted BMO Chief Economist Douglas Porter. "The Bank's expectation that the economy will be in excess supply by the second half of the year opens the door a crack to potential easing later this year if inflation continues to slow, but there's still a lot of wood to chop on that front.”

"We continue to expect the Bank to remain on hold until the end of 2023 before rate cuts begin in earnest in 2024,” he added.

In a press conference following the rate announcement, Bank governor Tiff Macklem commented on some market forecasts for rate cuts beginning later this year.

"…based on the information we have today, the implied expectation in the market that we’re going to be cutting our policy rate later in the year, that doesn’t look today like the most likely scenario to us,” he said.

Economic forecasts updated

The Bank also released its latest quarterly Monetary Policy Report, which included its most up-to-date economic forecasts, including two of the most closely watched indicators, inflation and GDP growth.

Inflation

The Bank said it expects inflation to continue to fall in line with previous forecasts. It made minor revisions, expecting annualized inflation to come in at 3.6% for 2023 before falling to its neutral target range by 2024.

"Recent data is reinforcing Governing Council’s confidence that inflation will continue to decline in the next few months,” the Bank said. "However, getting inflation the rest of the way back to 2% could prove to be more difficult because inflation expectations are coming down slowly, service price inflation and wage growth remain elevated, and corporate pricing behaviour has yet to normalize.”

GDP Growth

Thanks to better-than-expected growth in the first quarter, the Bank revised up its annual estimate for 2023 from 1% in its previous forecast to 1.4%. Growth for 2024 was subsequently revised down from 1.8% to 1.3%.

The Bank isn’t currently forecasting a recession, but is expecting growth to slow down in the coming months due to the lagged effects of rate hikes as well as the recent banking sector strains.