The Bank of Canada has decided to be patient and leaves its key rate at 5%, but it does not rule out other increases in the future.
The central bank’s decision was widely expected, given the mounting signs of weakness in the economy. But at 3.8%, the inflation rate is still too high for the central bank. Its board of directors “is concerned, however, by the slow progress towards price stability and by increasing inflationary risks, and is therefore prepared to increase the policy rate again if necessary,” its statement said.
At a press conference, Governor Tiff Macklem was clear: inflation will remain high for longer than the central bank predicted.
“We left the key rate at the same level because monetary policy is slowing the economy and easing price pressures, and because we want to give it time to do its job,” he said. -he says. But the fall in inflation is expected to continue slowly, and inflationary risks have increased.”
This is not the case currently. The inflation rate measured by the CPI has fallen to 3.8%, but the measures of core inflation that the Bank of Canada watches remain stationary around 4 to 5%.
In its Monetary Policy Report published at the same time as the announcement of the key rate, the central bank revises downwards its gross domestic product growth forecasts for 2024. There could be two or three negative quarters, but not this that we can call a recession, explained Tiff Macklem.
“Inflation is now forecast to remain around 3 ½% until mid-2024. As oversupply becomes in the economy and price pressures moderate, inflation is expected to fall again to approximately 2 ½ percent in the second half of 2024 and then return to target in 2025,” the report read.
The Bank of Canada insists “considerable” uncertainty surrounds its forecasts. The war in Israel and Gaza “could disrupt oil supplies and further fuel the rise in energy prices,” fears the central bank.
The monetary authorities are giving a rather gloomy reading of the progress made since the start of the interest rate increases. “There are more signs of an economic slowdown, easing price pressures, but progress towards price stability is slow and inflationary risks have increased,” they conclude.
