CAD drops vs USD as BOC holds rates OTTAWA — The Bank of Canada kept its main interest rate unchanged at 5% on Wednesday, and said senior officials are focused on how long the rate needs to stay at its current level to wrestle down stubbornly high inflation.
Bank of Canada Gov. Tiff Macklem said the central bank has not ruled out further policy rate increases should new developments, such as a widening conflict in the Middle East, push inflation higher. However, he said based on ample evidence of weakness among consumers and businesses, deliberations among senior officials ahead of Wednesday’s rate decision shifted “from whether monetary policy is restrictive enough to how long to maintain the current restrictive stance.”
In a statement outlining its rationale, the Bank of Canada said it expects inflation to remain close to 3% over the first half of 2024 before slowing gradually and reaching 2% in 2025. The central bank sets rate policy to achieve and maintain 2% inflation. The central bank said measures of core inflation, which strip out volatile items like food and energy, “are not showing sustained declines.”
Macklem, in prepared remarks he was set to deliver at a press conference later Wednesday morning, said senior officials are “concerned about the persistence in underlying inflation. We want to see inflationary pressures continue to ease and clear downward momentum in underlying inflation.”
Even though the Bank of Canada played down the prospect of more interest-rate increases, the central bank’s messaging Wednesday indicates it is prepared to wait before triggering rate cuts given elevated levels of inflation and annual wage growth. The latter is running at 4% to 5%, and the central bank has said the current pace, given the country’s moribund productivity record, would pose a stiff headwind in the quest to slow inflation to 2%.
Fixed-income traders started late last year to place bets on rate cuts starting in early 2024, leading to a drop in bond yields and, in turn, rates on consumer loans, such as mortgages. The Bank of Canada said standard mortgage rates in Canada have dropped by 0.65 percentage points since mid-October, and housing data indicate a subsequent pickup in existing-home sales.