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Bank of Canada holds key interest rate at 5% again, saying it’s still too soon for rate cuts

The Bank of Canada has held its key interest rate at five per cent again, saying that it’s still too soon to consider rate cuts while underlying inflation persists.

Economists were widely expecting the central bank to hold the rate. The bank said in a note on its website that it was still concerned about underlying inflation, which strips out volatile items like food or fuel.

Bank of Canada governor Tiff Macklem elaborated on those concerns during a press conference following the announcement. 

He said there are still global risks — like the attacks on Red Sea shipping routes, which have impacted global shipping costs — that could feed into higher inflation if they escalate.

WATCH | Macklem explains why the bank cares about core inflation: 

‘Why do we care about core inflation?’ Bank of Canada governor explains

1 hour ago

Duration 1:54

Tiff Macklem, governor of the Bank of Canada, says core inflation — which strips out volatile parts of the consumer price index — gives the bank a sense of where the trend is.

Domestically, “we are seeing a gradual easing in underlying inflationary pressures. The risk is that stalls,” he said. “We don’t want inflation to get stuck, materially, about our [2 per cent inflation] target.”

The central bank expects inflation to stay close to three per cent during the first half of this year before it slowly eases.

Higher interest rates need ‘more time,’ says Macklem

In his prepared remarks, Macklem said that there have been “no big surprises” since the Bank last held an interest rate announcement in January.

While the Canadian economy has staved off a recession, 2023 was one of its weakest recent years for growth. GDP increased by an annualized rate of one per cent in January.

Meanwhile, inflation came down to 2.9 per cent in January as price growth slowed. Groceries were still getting more expensive, but at a slower rate.

WATCH | Inflation has eased. Why isn’t the bank cutting interest rates? 

Inflation’s down. So where are the interest rate cuts?

5 days ago

Duration 4:14

After two years of aggressive interest rate hikes, inflation is seemingly back under control, causing many Canadians to start asking: Where’s the relief? CBC’s Peter Armstrong looks at whether the Bank of Canada has accomplished its goals and what we know about when rates could start to come back down.

“The assessment of the governing council is that we need to give higher interest rates more time to do their work,” said Macklem.

The Bank of Canada has maintained that it takes about 18 to 24 months for interest rate changes to work their way through the economy.

“It would be great if this worked faster, it would be great if it was less painful. But unfortunately, monetary policy, it does work slowly,” Macklem said later, while taking questions from reporters.

“It is an indirect channel. It’s got to work through the economy. It takes time to do that.”

Two people are shown seated during a press conference.
Bank of Canada governor Tiff Macklem and senior deputy governor Carolyn Rogers hold a press conference at the Bank of Canada in Ottawa on Wednesday, March 6, 2024. (Sean Kilpatrick/The Canadian Press)

‘Don’t want to give a false sense of precision’

Macklem reiterated on Wednesday that, in January, the bank couldn’t rule out the need to raise rates should inflation unexpectedly rise, but that discussions had shifted from whether policy was restrictive enough to how long it would have to stay at its current level.

It’s still too early to consider lowering the rate, he said. Future progress on inflation is expected to be gradual and uneven, he said.

“We want to give Canadians as much information as we have, but we also don’t want to give a false sense of precision,” Macklem said during the Q&A period.

The central bank last raised the key interest rate in July and has held it at 5 per cent on five occasions since.

The bank first raised interest rates in March 2022, the beginning of an aggressive campaign to cool inflation that resulted in 10 rate hikes in less than two years.

Meeting more ‘hawkish’ than expected, says economist

“This was a meeting where they were just very reluctant to talk about cutting rates,” said Veronica Clark, an economist with Citi Bank. “It is a bit more hawkish than I was expecting.”

Many economists are expecting a first rate cut in June. Clark — who anticipates the first cut will come in July — said she thinks the central bank will make a move once it sees that the three-month core inflation rate is holding within the bank’s target range.

WATCH | Not the right moment to cut rates, says Macklem: 

‘There will come a time’ to cut rates — but it’s not now, Macklem says

2 hours ago

Duration 2:23

Bank of Canada Governor Tiff Macklem says progress is being made in tackling inflation, but stressed that the bank doesn’t think this is the right moment to cut interest rates.

Clark added that we might only see one or two cuts this year. That will largely depend on how quickly the U.S. Federal Reserve cuts its own key interest rate, she said.

“We also do think that by the middle of the year, you will see some weaker [economic] activity data in the US,” she said, adding that she expects the U.S. to fall into recession by that time.

“That almost certainly would mean much weaker activity for Canada also,” Clark said.

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