No change on the interest rate while the Bank of Canada sticks to 5%

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The Bank of Canada announced that its key overnight lending rate will remain at 5 percent, keeping its benchmark unchanged for the fourth time in a row.

Today’s announcement was predicted by many economists. The central bank last raised interest rates in July 2023.

At a news conference Wednesday morning, central bank Governor Tiff Macklem said discussions at the Bank of Canada were now shifting from amount to duration.

Instead of primarily looking at whether the bank’s policy interest rate is high enough, the bank is now asking how long its “current restrictive stance” of higher interest rates should be in place.

Inflation “still too high”, says Macklem

Despite this potential change in messaging, the bank is not saying interest rates will fall soon, given ongoing concerns about inflation.

In a prepared speech, Macklem noted that inflation had fallen in recent months as higher interest rates imposed by the Bank of Canada helped slow the economy.

But “inflation is still too high,” he said, stressing that there are still inflationary pressures. The governor told reporters it was “premature” to discuss an interest rate cut.

Although Macklem said the bank was not ruling out further rate hikes if inflation rises, he also said that if the economy “moves broadly in line” with current projections, he does not expect an increase in interest rates be discussed.

A building with the words Bank of Canada on it.
The predictions of most economists came true Wednesday as the Bank of Canada kept its overnight interest rate at 5 percent. (Adrian Wyld/The Canadian Press)

“I expect future discussions to focus on how long we keep the policy rate at 5 percent,” he said.

Canada’s inflation rate fell for much of last year, but increased in December. Bank of Canada forecasts predict inflation will reach its target of around 2% by 2025.

As for economic growth, by some measures it had begun to stagnate and slow by the end of last year.

“We don’t think we need a deep recession to bring inflation back to target. But we do need this period of low growth,” Macklem told reporters Wednesday.

Rate cuts to come, economists say

Economists at CIBC and Bank of Montreal reacted to today’s announcement by forecasting an interest rate cut in June 2024, with BMO saying “rate hikes over the past two years make their work “.

The central bank’s interest rate influences the cost of debt for Canadians who take out variable-rate loans and mortgages, and can also affect the interest rates on some savings accounts.

WATCH | Tiff Macklem on cutting interest rates:

“We’re not there yet”: Bank of Canada governor questioned on rate cuts

Tiff Macklem says inflationary pressures need to ease further before the Bank of Canada can cut interest rates.

Mortgage rates are one thing economist Jeremy Kronick is watching, noting that many Canadians who took out or renewed their mortgages when rates were at their lowest will soon have to renew or refinance at today’s much higher costs. ‘today.

According to Kronick, the Bank of Canada must be careful not to leave interest rates too high for too long. If more Canadians faced significant increases in mortgage costs, they would be unable to spend elsewhere, which could exacerbate the economic downturn.

“To the extent that people have saved and prepared for it, that’s great. To the extent that they haven’t and there’s a big enough shock, that could push things into a situation worse than perhaps the bank anticipates,” Kronick said. who is director of the Center on Financial and Monetary Policy at the CD Howe Institute in Toronto.

A bearded man in a navy blue suit poses for a portrait.
Economist Jeremy Kronick says rising mortgage costs could have bigger effects if the Bank of Canada waits too long to lower interest rates. (Craig Chivers/CBC)

Kronick said he expects a “neutral” interest rate from the Bank of Canada to be around 3 percent. It is unclear when the bank will be able to achieve such an interest rate, given current variables, such as the impact of geopolitical tensions on international shipping costs, he said.

Regardless, he said Canadians shouldn’t expect extremely low interest rates in the coming months.

“It will be higher, in my opinion, than before the pandemic,” he said.

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