Focus Outlook

Interest Rate Held Steady at 1.5% as Economy Softens and Inflation Cools


The Bank of Canada has opted to maintain its current interest rate at 4.5%, announcing the decision as the effects of its previous eight rate hikes unfold throughout the Canadian economy. This move was widely expected, as the Bank had already signaled its intention to halt further rate increases after a series of hikes between March 2022 and February of the current year.

The Bank of Canada initially lowered its benchmark lending rate during the early days of the pandemic to stimulate economic activity. However, in early 2022, in response to soaring inflation, the Bank began an aggressive campaign of rate hikes.

In June 2022, Canada’s inflation rate had surpassed eight percent, but by February 2023, it had cooled to just over five percent. Data for March, expected to be released in the coming week, could indicate a further cooling of the inflation rate to as low as four percent. This reduction in inflation is the primary reason for the Bank of Canada’s decision to pause its rate adjustments for now.

In its announcement, the Bank forecasted that the official inflation rate would decrease to three percent by mid-year and eventually reach its target rate of two percent by the end of the following year.

The Bank left the door open for potential future rate hikes if deemed necessary. However, policymakers at the Bank expressed the belief that the rate changes implemented thus far are achieving the intended effect of slowing down the economy to combat inflation.

While homeowners are relieved by the decision, some experts caution against assuming rate cuts will follow soon. Brett House, an economics professor at Columbia Business School, emphasized that the central bank will be cautious about cutting rates while inflation remains above its target and strong pressures persist from the real economy.

House also pointed out concerns that the recent wave of rate hikes may impact Canadian households as they face higher interest rates when renewing home loans, potentially impacting their spending power and financial well-being. The Bank of Canada’s decisions will continue to have significant implications for the broader economy and households across the country.


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