Bank of Canada holds interest rate at 5%

Citing ongoing worries about the trajectory of inflation, the Bank of Canada maintained its policy rate at five percent on Wednesday. Since last July, the bank has maintained its rate at five percent. Despite a 1% annual GDP growth, the Canadian economy remained fragile in the fourth quarter of 2023. Because employment is increasing more slowly than population growth, the labour market is more evenly balanced to benefit employers but to disadvantage of employees looking to make ends meet.

Pressures on housing and gasoline costs are two major causes of inflation volatility. Gasoline prices are about to become even more expansive on April.01 due to 23% carbon tax increase suggested by the Liberal government. For a fact, gasoline prices are about to become on average 15 cents more expansive per litre of gasoline. Housing market has seen some improvements, average home values have decreased slightly, but not nearly as much as needed for Canadians to call it affordable.

The cost of living is not getting any better, inflation is not getting any better and therefore the decision from Bank of Canada was somewhat expected. Surely, this is something realtor did not want to hear as they surely hyped up their potential clients to get into market once again claiming the home prices will rise during spring while the lending rates will drop. None of those things happened and most likely will not happen as long the home prices stay where they are and other costs of living in Canada increase.

Most economists anticipated that the rate would be held by the central bank. The bank expressed its continued concern about underlying inflation in a note posted on its website. It anticipates that for the first half of this year, inflation would hover around 3% before gradually declining. But will it decline in second half of 2024?

If we take in account that home prices do not drop and that gasoline, natural gas and alcohol prices will rise on April 01, what should we expect? The same or even worse as during previous months! We all know that energy prices are directly entangled with other products and services. Every increase in fuel costs has resulted in price gauging. Does anyone expect food, transportation or any other products and service costs to decrease?

No, in contrary, no one needs to be an economy expert, but rather by looking back, we can assume that the prices will increase across the field. Leading to another rate freeze.

Bank of Canada Explanation

At a press conference, senior deputy governor Carolyn Rogers and governor Tiff Macklem of the Bank of Canada provided additional details regarding the rate decision.

Macklem stated in his prepared remarks that since the Bank’s previous interest rate announcement in January, there have been “no big surprises”.

Even though the Canadian economy avoided going into recession, growth in 2023 was among the worst in recent memory. In January, the GDP grew at an annualized rate of 1%. In the meantime, as price rise eased in January, inflation dropped to 2.9%. Still far away from 2% target.

Macklem reaffirmed on Wednesday that while the bank couldn’t completely rule out the need to hike rates in January in the event of an unanticipated increase in inflation, the focus of conversations had moved from whether the policy was sufficiently restrictive to how long it would have to remain at its current level.

He stated that it is still too early to think about cutting the rate. He stated that future inflation progress is anticipated to be uneven and sluggish.

Avery Shenfeld, chief economist at CIBC, stated in a note to clients on Wednesday morning that new projections for inflation and economic growth, along with “more clarity” regarding the rate path, will be provided at the next central bank decision on April 10.