The Bank of Canada delivered its first rate pause of the current rate-hike cycle yesterday, but Deputy Governor Carolyn Rogers made clear it remains a “conditional pause.”
Whether the Bank remains on the sidelines or steps back in with an additional rate hike—or hikes—remains dependent on forthcoming economic data.
“If economic developments unfold as we projected and inflation comes down as quickly as we forecast in the January Monetary Policy Report, then we shouldn’t need to raise rates further,” Rogers said during a speech in Winnipeg on Thursday. “But if evidence accumulates suggesting inflation may not decline in line with our forecast, we’re prepared to do more.”
Rogers noted that inflation remains too high for the Bank’s liking. “We can all agree that it’s still too high,” she said. While acknowledging that progress has been made, with the headline CPI inflation figure falling from 8.1% last summer to 5.9% as of January, “we still have a way to go to get back to our 2% target,” she said.
“We know that adjusting to higher interest rates has been hard for many Canadians,” she added, noting that the Bank’s policy rate of 4.50% is now at a 15-year high.
Canada will “chart its own course” on monetary policy
Rogers touched on the global phenomenon of record-high inflation, and how central banks around the world are undertaking a similar strategy of tightening monetary policy to rein it back in.
“When it comes to monetary policy, Canada has had one of the most forceful tightening cycles,” Rogers said, pointing to the Bank of Canada’s eight consecutive rate hikes totalling 425 basis points over the course of 2022 and early 2023.
Focus will shift to the U.S. Federal Reserve’s upcoming rate decision on March 21, particularly in response to Chair Jerome Powell’s comments this week that interest rates south of the border are likely to continue rising.
“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” he said in a speech on Capital Hill.
While Canadian monetary policy typically doesn’t stray too far from that of the U.S., current conditions appear to warrant a slightly diverging path, something that the Bank of Canada has addressed previously. The federal funds rate in the U.S. is currently in a range of 4.50% to 4.75%, with the upper end a quarter-point above Canada’s benchmark rate.
But households in Canada are “some of the most indebted in the G7,” Rogers noted, making borrowers on this side of the border much more rate-sensitive.
“As global inflationary pressures continue to recede, each country will need to chart its own course to get back to price stability,” she said. “Canada, like other countries, has unique circumstances that will affect the path of the economy and inflation.”
The Bank of Canada’s next rate decision will take place on April 12.
Featured image by David Kawai/Bloomberg via Getty Images
