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Bank of Canada Holds Off on Rate Hike, Awaits Further Evidence

The Bank of Canada (BoC) chose not to increase interest rates earlier this month as they sought more evidence on the impact of previous monetary tightening on growth and inflation. This information comes from the minutes of the policy-setting meeting released on Wednesday.

Bank of Canada
Bank of Canada

Key Overnight Interest Rate Unchanged

On April 12, the central Bank kept its key overnight interest rate at 4.50% for the second consecutive time. The BoC adopted a hawkish tone, dismissing market expectations of a rate cut this year as the risk of a recession lessened.

Inflation and Growth Concerns

The six governing council members observed that growth had been stronger than forecast in January. They expressed concerns about reducing inflation towards the 2% target in the year's second half.

Rationale Behind Maintaining the 4.50% Rate

The minutes they were stated that the decision to keep the policy rate at 4.50% was due to the governing council's belief that headline inflation was decreasing quickly to the Bank's forecast. More evidence was needed to determine if monetary policy was restrictive enough.

Inflation Rates and Projections

Inflation peaked at 8.1% last year and fell to 4.3% in March. The BoC anticipates inflation will hit 3% this summer, but reaching 2% may take time due to persistent services costs and wage growth.

BoC's Stance on Future Rate Hikes

Last month, the BoC became the first major central bank to pause it's tightening campaign. Governor Tiff Macklem said he wanted to let the eight previous rate hikes sink in and would hold off on additional increases as long as inflation decreased as forecasted.

Labor Market and Economic Strength

The governing council recognized the ongoing tightness in the labor market and predicted that a slowdown in growth would likely be delayed. They agreed that the economy was performing better than expected.

Restrictive Monetary Policy Outlook

After maintaining the current interest rates this month, the BoC said they would need to remain restrictive longer. They deemed money market expectations for a rate cut later this year unlikely.

Canadian Inflation Forecast

Excluding food and energy costs, Canadian inflation is predicted to stay above 3% until the fourth quarter of this year, according to a recent survey of seven economists by Reuters. This could hinder the possibility of an early BoC shift to cutting interest rates.