No change on interest rate as Bank of Canada sticks to 5%


The Bank of Canada has announced its key overnight interest rate will remain at five per cent, keeping its benchmark the same for the fourth time in a row.

Today’s announcement was predicted by many economists. The central bank last raised interest rates in July 2023.

At a press conference on Wednesday morning, the central bank’s governor, Tiff Macklem, said discussions at the Bank of Canada are now shifting from how high to how long.

Instead of looking primarily at whether the bank’s policy-setting interest rate is high enough, the bank is now considering how long its “current restrictive stance” of a higher interest rate needs to be in place.

Inflation ‘still too high’: Macklem

Despite that potential shift in message, the bank is not saying interest rates will be falling soon, given continued concern about inflation.

In a prepared speech, Macklem pointed out that inflation has been falling over the past few months as increased interest rates driven by the Bank of Canada have helped slow the economy.

But “inflation is still too high,” he said, pointing out that there are still inflationary pressures. The governor told reporters it’s “premature” to be discussing a cut to interest rates.

While Macklem said the bank has not ruled out further rate increases if inflation rises, he also said that if the economy “evolves broadly in line” with current projections, he does not expect an interest rate hike to be discussed.

A building that says Bank of Canada on it.
The predictions of most economists came true on Wednesday as the Bank of Canada kept its trendsetting overnight interest rate at five per cent. (Adrian Wyld/The Canadian Press)

“I expect future discussions will be about how long we maintain the policy rate at five per cent,” he said. 

The inflation rate in Canada declined for much of the last year, but moved upward in December. The Bank of Canada’s forecasts expect inflation to reach its targets of around two per cent by 2025.

As for economic growth, by some measures it had begun to stall and slow down at the end of last year.

“We don’t think we need a deep recession to get inflation back to target. But we do need this period of weak growth,” said Macklem told reporters on Wednesday.

Rate cuts to come, say economists

Economists from both CIBC and the Bank of Montreal reacted to today’s announcement by predicting a cut to the interest rate in June 2024, with BMO saying “rate hikes over the past two years are doing their job.”

The central bank’s interest rate influences the cost of debt for Canadians taking out variable-rate loans and mortgages, and can also affect the interest rates on some savings accounts.

WATCH | Tiff Macklem on cutting interest rates: 

‘We’re not there yet’: Bank of Canada governor asked about rate cuts

Tiff Macklem says inflationary pressures have to ease further before the Bank of Canada can lower interest rates.

Mortgage rates are one of the things economist Jeremy Kronick is watching for, pointing out that many Canadians who took out or renewed mortgages when rates were at their lowest will soon need to renew or refinance at today’s significantly higher costs. 

According to Kronick, the Bank of Canada needs to be careful about leaving interest rates too high for too long. If more Canadians face significant increases in mortgage costs, they wouldn’t be able to spend elsewhere which could exacerbate an economic slowdown.

“To the extent that people have saved and prepared for that, that’s great. To the extent that they haven’t and there’s a pretty big sticker shock, that could push things into a worse situation than perhaps the bank expects,” said Kronick, who is director of the Centre on Financial and Monetary Policy at the C.D. Howe Institute in Toronto.

A bearded man in a navy blue suit poses for a portrait.
Economist Jeremy Kronick says higher mortgage costs could have broader effects if the Bank of Canada waits too long to drop interest rates. (Craig Chivers/CBC)

Kronick said he expects a “neutral” interest rate from the Bank of Canada would be around three per cent. It’s unclear when the bank would be able to hit an interest rate like that given ongoing variables, such as the impact of geopolitical tensions on international shipping costs, he said.

Regardless, he said Canadians should not expect rock-bottom interest rates in the coming months.

“It’s going to be higher, in my view, than pre-pandemic,” he said.

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