Written by 3:10 PM Bank of Canada, Interest Rates Views: 6

Bank of Canada delivers long-awaited rate pause. Will it last?

As expected, the Bank of Canada delivered its first rate pause in a year following eight consecutive rate hikes.

Bank of Canada rate decision January 2023

For Canada’s variable-rate mortgage holders, no news was good news today.

As expected, the Bank of Canada delivered its first rate pause in a year following eight consecutive rate hikes.

The Bank’s overnight target rate remains at 4.50%, while prime rate—the rate upon which variable rates and lines of credit are priced—remains at a 22-year high of 6.70%.

In its announcement, the Bank of Canada left the door open for further rate hikes should economic data warrant it.

“Governing Council will continue to assess economic developments and the impact of past interest rate increases, and is prepared to increase the policy rate further if needed to return inflation to the 2% target,” it said.

The Bank touched on the latest economic indicators, including January’s headline CPI inflation reading 5.9% (down from a high of 8.1%), economic growth coming in flat in Q4 (mostly due to a slowdown in inventory) and the recent “surprisingly strong” employment growth.

“Overall, the latest data remains in line with the Bank’s expectation that CPI inflation will come down to around 3% in the middle of this year,” the Bank noted. “With weak economic growth for the next couple of quarters, pressures in product and labour markets are expected to ease.”

Will the rate pause be sustained?

While there was really no uncertainty about today’s rate pause, the question on mortgage borrowers’ minds now is whether the Bank will remain on hold, and the direction of any future rate move.

Most observers so far believe the Bank can safely stay on the sidelines for now as the effects of its 425-basis points of rate tightening continue to work through the economy.

“Growth and inflation data has come in line with or below what the Bank had pencilled into their latest [Monetary Policy Report],” noted economists from National Bank of Canada. “We’d also note that references to ‘excess demand’ are gone, implying that rate hikes are working as intended.”

Even though the Bank’s statement didn’t overtly state that it expects to hold the policy rate at its current level, “at least based on the domestic economic outlook (relative to January’s MPR), we do believe this pause can be sustained,” the National Bank economists argue. “As such, we will be looking for another ‘no change’ decision next month, conditional on the continued cooperation in economic/inflation data that we expect to see.”

Potential recession still on the horizon

James Orlando at TD Economics commented that the Bank’s statement shows it “isn’t in a rush to start hiking again.”

“Higher rates have also taken a big bite out of the interest rate-sensitive parts of the economy, with the real estate market still in the process of finding a bottom,” he wrote in a note to clients.

Indeed, the question in the months ahead will be how the country’s “debt-saddled” economy responds to the rate hikes delivered to date, said Marc Desormeaux, Principal Economist at Desjardins.

“We think that this year, the Canadian economy will increasingly feel the full impact of last year’s interest rate hikes,” he wrote in a research note.

“Lagged and significant rate impacts anchor our call for a recession later in 2023,” Desormeaux added. “Evidently, the Bank also feels that there is more economic weakness to come, and that will help bring price pressures closer to the 2% target. How strongly and how quickly that economic slowdown comes will determine whether the BoC continues to stick to its plan.”

Canada and U.S. rates: a diverging path forward?

The Bank of Canada’s next rate decision will take place on April 12. But before that, markets will be watching the upcoming Federal Reserve rate decision south of the border on March 21.

While the Bank of Canada remains on pause, the Fed has signalled it expects to continue tightening, which would see the target rates in Canada and the U.S. start to diverge.

“Nothing about the [economic] data [to date] suggests to me that we’ve tightened too much – indeed, it suggests that we still have work to do,” Fed Chair Jerome Powell said this week.

BoC Deputy Governor Paul Beaudry commented in February on the potential for the Canadian and U.S. central banks to take diverging paths forward in the months ahead, saying, “we shouldn’t be too concerned if Canada follows a slightly different path to normalization than our counterparts.”

“While BoC-Fed policy divergence and related currency implications have been hotly debated, we do think the BoC is willing to tolerate a growing policy differential and would accept the weaker Canadian dollar,” National Bank economists wrote. “That said, there is probably a line in the sand somewhere—the key words in Beaudry’s comments were a ‘slightly different path.'”

Featured image: Renaud Philippe/Bloomberg via Getty Images

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Last modified: March 8, 2023

Steve Huebl is a graduate of Ryerson University's School of Journalism and has been with Canadian Mortgage Trends and reporting on the mortgage industry since 2009. His past work experience includes The Toronto Star, The Calgary Herald, the Sarnia Observer and Canadian Economic Press. Born and raised in Toronto, he now calls Montreal home.