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Bank of Canada Keeps the Interest Rate at 5% in January 2024, No Change in it

The Bank of Canada has officially recognized the likelihood of a decrease in interest rates this year, although it refrains from specifying the exact timing.

As anticipated, the Bank declared on Wednesday morning that it will maintain its key overnight lending rate at five percent.

However, it suggested the possibility of impending cuts, even though inflation levels are still higher than preferred.

During a press conference, Bank governor Tiff Macklem avoided committing to a specific timeline for the reduction of rates, acknowledging the inherent uncertainty in economic forecasting.

The Bank of Canada has acknowledged the likelihood of interest rates decreasing this year but remains hesitant to specify the exact timing.

As expected, the Bank, in its announcement on Wednesday morning, maintained the key overnight lending rate at five percent. However, it hinted at potential cuts, despite the ongoing challenge of higher-than-desired inflation.

During a press conference, Bank governor Tiff Macklem avoided committing to a specific timeline for rate reductions, emphasizing the inherent uncertainties in economic forecasting.

Macklem expressed concerns about providing a false sense of precision by calendaring rate adjustments.

Nevertheless, Macklem indicated a broad consensus within the Bank’s governing council that rates were unlikely to increase in the future.

He stated, “If the economy evolves broadly in line with the projection we published today, I expect future discussions will be about how long we maintain the policy rate at five percent.”

Over the past 22 months, the Bank has implemented 10 interest rate hikes to curb inflation.

The strategy is based on the theory that increasing the cost of borrowing reduces spending by consumers and businesses, thereby lowering prices and slowing economic growth. Conversely, rate cuts encourage spending and stimulate economic expansion.

In December, Canada’s annual inflation rate rose to 3.4 percent, surpassing the Bank’s two percent target.

However, Macklem attributed the moderation in inflation to weakened demand resulting from previous rate hikes and improved supply chains.

Economists and analysts now anticipate rate cuts this year, with the consensus being a matter of when, rather than if, the Bank will implement them.

Pedro Antunes, chief economist at the Conference Board of Canada, predicts rate cuts starting by the middle of the year, emphasizing the sluggish pace of the Canadian economy.

Market indicators also reflect expectations, with the overnight interest swaps market fully pricing in a quarter percentage point rate cut by June, and a 40 percent chance of a cut in April, according to Benjamin Reitzes, a strategist at BMO.

However, Reitzes notes that the Bank, concerned about ongoing inflation strength, is not rushing to implement rate cuts.