Bank of Canada hikes rates, becomes first major central bank to signal pause

Bank of Canada hikes rates, becomes first major central bank to signal pause

2/2 © Reuters. FILE PHOTO: A Canadian dollar coin, commonly known as the “Loonie”, is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch/File Photo 2/2

By Steve Scherer and David Ljunggren

OTTAWA (Reuters) – The Bank of Canada on Wednesday hiked its key interest rate to 4.5%, the highest level in 15 years, and became the first major central bank fighting global inflation to say it would likely hold off on further increases for now.

The 25-basis-point increase was in line with analysts’ expectations. The bank has raised rates at a record pace of 425 basis points in 10 months to tame inflation, which peaked at 8.1% and slowed to 6.3% in December, still more than three times the bank’s 2% target.

The members of the Governing Council “clearly have enough confidence that the tightening currently in place is already slowing the economy that they are comfortable they won’t need to lift rates further in most scenarios,” said Andrew Kelvin, chief Canada strategist at TD Securities.

Growth this year will be stronger than had been projected in October but is expected to stall through the first half, the bank said in its quarterly Monetary Policy Report (MPR), which includes new forecasts. Inflation will fall to about 3% around the middle of this year, and reach target next year.

“We are turning the corner on inflation,” Bank of Canada Governor Tiff Macklem told reporters. “We are still a long way from our target, but recent developments have reinforced our confidence that inflation is coming down.”

If the economy evolves as forecast, the bank “expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases,” the statement announcing the rate hike said.

“Governing Council is prepared to increase the policy rate further if needed to return inflation to the 2% target,” the statement said.

The central bank had said in December that future rate decisions would be data dependent, and a blowout December employment report, released earlier this month, highlighted the upside risk to wage and price growth.

“The Bank of Canada is back to using forward guidance,” said Royce Mendes, director and head of macro strategy at Desjardins. “That likely ensures a pause in the rate-hiking cycle for at least the next few months.”

While food and shelter cost increases are still weighing on households and headline inflation is still high, the bank said in its MPR that “three-month CPI inflation has fallen to about 3.5%, suggesting a significant slowdown in inflation in coming months.”

The Canadian dollar weakened to 1.34 per U.S. dollar, down 0.2% on the day, after the rate hike. Canada’s 10-year yield eased 6.5 basis points to 2.792%.


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Author: Reuters

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