Bank of Canada holds its key interest rate at 5 per cent
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OTTAWA (CTV Network) — The Bank of Canada held its policy rate at 5 per cent on Wednesday, saying it needs to see a sustained decline in inflation before rate cuts can begin.
“I realize that what most Canadians want to know if when we will lower our policy interest rate,” said Bank of Canada Governor Tiff Macklem. “What do we need to see to be convinced it’s time to cut? The short answer is we are starting to see what we need to see, but we need to see it for longer to be confident that progress toward price stability will be sustained.”
The central bank projects inflation to ease from 3 per cent earlier in of 2024 to 2.5 per cent by the end of this year. Inflation is expected to return to target by 2025, and fell to 2.8 per cent in February.
While progress has been made in cooling inflation, costs in services and food remain elevated.
There are also risks that remain that could potentially drive inflation up again. The central bank is concerned about three main areas that could push inflation higher. House prices could rise more than anticipated due stronger demand on supply. Shelter price inflation remains high at 7 per cent, driven by high mortgage costs and strong growth in rent.
Additionally, the bank is not convinced that wage growth, a key driver in costs, will remain stable. If weak productivity continues, firms could face higher price pressures.
Finally, global tensions such as the wars in the Middle East and in Ukraine, could impact global commodity prices further.
“We don’t want to leave monetary policy this restrictive longer than we need to,” said Macklem. “But if we lower our policy rate too early or cut too fast, we could jeopardize the progress we’ve made bringing down inflation.”
The bank projects gross domestic product (GDP) growth to pick up in the latter half of this year, with the economy expected to grow by 1.5 per cent this year, 2.2 per cent next year and 1.9 per cent in 2026.
An increase in business investment, the completion of the Trans Mountain pipeline and population growth are the key factors that are leading to better growth in the economy.
Canadian exports are also expected to get a boost this year, fuelled mainly by higher demand from the United-States.
The next rate announcement is scheduled on June 5.
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