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Bank of Canada Maintains Interest Rate, Signals Hawkish Stance Amid Recession Concerns

As anticipated, the Bank of Canada (BoC) kept its key overnight interest rate at 4.50% but adopted a hawkish tone. The central bank diminished expectations of a rate cut this year as the risk of a recession has decreased.

Bank of Canada
Bank of Canada

Inflation Target Timeline Extended

The BoC acknowledged that achieving the 2% inflation target would take longer than initially expected in January. The central bank also expressed its readiness to raise interest rates if necessary.

BoC Pauses Tightening Campaign

Last month, the BoC became the first major global central bank to halt its tightening campaign. Governor Tiff Macklem desired to observe the impact of the previous eight rate hikes and postpone further increases as long as inflation decreases as projected.

Market Expectations vs. BoC's Stance

All 33 economists surveyed by Reuters agreed that the BoC would maintain its key overnight rate. However, money markets are factoring in 25 basis points of easing by year-end, a decrease from the 35 basis points anticipated before the interest rate decision.

Positive Growth and Declining Inflation

Macklem indicated that the most likely scenario for this year is positive, albeit weak, growth and declining inflation. The central bank has revised its growth forecast for the year to 1.4% from the 1.0% predicted in January.

Inflation Concerns and Labor Market

The BoC is concerned about progressing toward its 2% inflation target, with some experts suggesting more action. The central bank noted that demand continues to exceed supply and that the labor market remains tight.

Tiff Macklem, Bank of Canada Governor
Tiff Macklem, Bank of Canada Governor

Inflation Projections and Policy Considerations

The BoC expects the Consumer Price Index (CPI) inflation to drop to around 3% by mid-year and decline gradually to the 2% target by the end of 2024. Macklem explained that high-interest rates might be necessary for an extended period due to persistent service prices and wage pressure.

Tighter Credit Conditions and Canadian Dollar

The BoC recognized tighter credit conditions in the United States and Europe due to recent banking failures but noted that the situation is improving. The Canadian dollar traded 0.1% higher at 1.3447 to the greenback or 74.37 U.S. cents.