Mar 8, 2023
The Bank of Canada held interest rates. What happens next?
Bank of Canada holds steady on pause to rate hikes
The Bank of Canada announced Wednesday it would hold its key overnight rate at 4.5 per cent after eight consecutive interest rate increases – and experts said the pause could last throughout 2023 as the bank watches the economy responds to its policy moves so far.
Economists told BNNBloomberg.ca the months ahead will reveal how economic indicators – in particular, inflation and the labour market -- react to the dramatic series of hikes that began last March at a pandemic-low interest rate of 0.25 per cent.
“The question now is how strongly Canada’s debt-saddled economy responds following months of aggressive monetary tightening,” Marc Desormeaux, principal economist of Canadian economics at Desjardins, told BNNBloomberg.ca in a Wednesday phone interview.
Leslie Preston, senior economist at TD Economics, said in a Wednesday phone interview that the Bank of Canada is in a “wait and see period” as the cumulative effect of the last year of monetary policy sets in.
CIBC chief economist Avery Shenfeld echoed the idea that the bank could take a hands-off approach to interest rate adjustments this year.
“What likely comes next for the Bank of Canada is a very long nap, in the sense that interest rates are unlikely to change over the balance of 2023 if the economy performs as we expect,” he said.
KEY DATA TO COME
The Bank of Canada (BoC) highlighted the still-tight labour market in its Wednesday statement on the rate decision, and referenced falling inflation that at 5.9 per cent still sits well above the central bank’s two per cent target.
Statistics Canada data on February’s employment numbers and inflation are expected in the coming weeks, and those numbers will be “relatively crucial in terms of where we go next,” said Doug Porter, chief economist of BMO Financial Group.
Preston said she will be watching closely for a softening in the jobs numbers relative to January’s strong labour market report.
“For inflation to continue to come down, we're going to need to see some softening in the labour market,” she said.
A Thursday speech by deputy governor Carolyn Rogers could give further clues about the thinking behind the BoC’s decision to hold, Porter added, while an upcoming summary of the bank’s deliberations has potential to shed further light on the policymaking process.
IMPACT ON CANADIANS
The fact that rates didn’t rise again on Wednesday offers “some relief” to borrowers, said Preston – but a pause doesn’t lessen the economic pain from higher rates that is already setting in.
Canada’s housing market has already started absorbing the higher interest rates, and Preston said that will continue as more people’s fixed-rate mortgages come up for renewal.
“That impact, as more and more people renew every quarter, is going to weigh on household spending for a couple of years,” she said.
People will also notice higher borrowing costs as they seek to finance other major purchases like cars and appliances, she said.
Desormeaux said he’s anticipating a “short and shallow recession” in Canada this year as the economy slows down in response to the rate increases – which will in turn weigh on workers as jobs become more scarce.
Canadians will “feel the pinch” of rates in their mortgages, wages and job prospects in 2023, said Shenfeld, but people can also expect some relief while shopping for goods and services if inflation continues to come down.
“There's some economic pain, particularly for those with big mortgages that are renewing at higher rates, but there is a broader benefit to consumers from not facing ever-escalating prices,” he said.
WHEN WILL THE CENTRAL BANK CUT RATES?
The central bank stressed on Wednesday that it is “prepared to increase the policy rate further” to get inflation down to its two per cent target.
Economists who spoke with BNNBloomberg.ca said they largely expect the BoC to leave its key interest rate at 4.5 per cent in the year ahead, even as it left the door open to more tightening.
Shenfeld said he expects the BoC’s language about its future direction will likely become clearer in the coming months.
“At some point, likely by this summer, the bank will be more definitive in its projection that they're done with rate hikes,” he said, predicting that the key interest rate will remain unchanged through 2023 if the economy progresses as expected.
Preston and Desormeaux predicted rate cuts could start by the fourth quarter of this year, while Shenfeld and Porter said they think cuts are more likely to happen in 2024.
The BoC said Wednesday that it expects inflation could reach three per cent by the middle of this year, but economists said more rate hikes could be on the table if inflation rears its head again.
Porter said it would take a couple of months of disappointing inflation data or “indications that that the economy is still barreling forward” to prompt more tightening from the central bank – but the move clearly has not been ruled out.
“I don't think the bank is in any way committed to staying on the sidelines,” he said. “They're pretty clear that if they're going to move on rates, it's going to be up, not down in the year ahead.”