Bank of Canada holds policy rate at 4.5 per cent

The Bank of Canada held its policy rate at 4.5 per cent on Wednesday, with the central bank remaining confident inflation will continue to decline from 5.2 per cent in February to 3 per cent by the middle of this year.

The Bank of Canada held its policy rate at 4.5 per cent on Wednesday, with the central bank remaining confident inflation will continue to decline from 5.2 per cent in February to 3 per cent by the middle of this year. However, the bank acknowledged getting inflation back to its 2 per cent target in 2024 will be more challenging.

“Getting inflation the rest of the way back to 2 per cent 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,” reads the statement released on Wednesday.

The bank would not say whether another hike in the overnight rate is required to return inflation to target, but indicated it is prepared to raise the policy rate further if needed.

Persistent costs of services in the Canadian economy remain the driving factor in inflation, with a tight labour market and wage growth remaining around 4 to 5 per cent. Statistics Canada reported 205,000 net new jobs in the first three months of this year, exceeding expectations, and the unemployment rate remains at a historic low of 5 per cent.

Economic growth in the Canadian economy in the beginning of 2023 was slightly higher than initially projected, with GDP growth sitting at 2 per cent in the first quarter. Growth for the remainder of the year is expected to average less than 1 per cent, with the likelihood of negative growth still a possibility.

Household spending in Canada continues to slow in 2023, caused mainly by elevated debt and the cost of servicing it. The central bank expects the share of income spent on interest payments will continue to rise this year, as households renew their mortgages.

“The effective interest rate on household debt is estimated to have risen to 5.5. per cent in the first quarter of 2023,” reads the Monetary Policy Report (MPR) released on Wednesday. “Interest payments rose to $133 billion on an annual basis in the fourth quarter of 2022, 45 per cent higher than one year earlier.”