The Bank of Canada keeps its key rate at 4.5%

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The Bank of Canada maintains its key rate at 4.5%

Central Bank of Canada Governor Tiff Macklem (File Photo)

After raising its key rate eight times over the past year in an attempt to slow inflation, the central bank is giving Canadian taxpayers a break by keeping its rate at 4.5%.

Stating that economic growth was zero in the fourth quarter of 2022, the Bank of Canada points out that consumption, government spending and net exports are nevertheless still on the rise in Canada.

Globally, economic developments were generally in line with the outlook presented in January's Monetary Policy Report (MPR), notes the institution's Governing Council. Global growth continues to slow, and inflation – although still too high – is coming down mainly due to lower energy prices.

Last increase in the Bank of Canada's key rate took place on January 25. The 0.25 percentage point increase had then raised the policy rate to 4.5%.

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These repeated increases in the policy rate aim to control inflation by increasing the cost of credit for consumers and businesses. After peaking at 8.1% on an annual basis in June 2022, inflation measured on an annual basis was 5.9% in January.

Despite a notable improvement, the price spike remains well above the 2% to 3% range targeted by the Bank of Canada.

But, still confident in achieving its objectives, the Bank is staying the course.

“Overall, the latest data is still consistent with the Bank's expectation that consumer price inflation will decline to around 3% by mid-year. »

— Excerpt from the Bank of Canada press release

Given the weak growth expected in the coming quarters, pressures on the product and labor markets should ease, forecasts the institution. This should moderate wage growth and also increase competitive pressures, making it harder for companies to pass on their cost increases to consumer prices.

Although it does not raise its key rate, the central bank's Governing Council warns that it is closely monitoring the development of the economy and that it is stands ready to raise the policy rate further if necessary to bring inflation back to the 2% target.

While theoretical at first sight, the increase in the policy rate of the Bank of Canada has a noticeable impact on consumers' wallets and the economy in general by almost automatically increasing interest rates, the cost of credit and particularly mortgages.

Combined with continuing rising prices, this interest rate spiral is weighing heavily on the budgets of many households in Canada, with wages not rising as rapidly as the cost of living.

The recent hikes in the key interest rate have still not succeeded in stemming the soaring prices of food and the grocery basket, which are still hovering around 11% on a annual. Fuel and housing costs are also slow to come down.

“Food and housing prices continue to show strong increases and therefore continue to challenge Canadians.

— Excerpt from Bank of Canada statement

One ​​of the reasons why the Bank of Canada's remedies are not working so quickly than they should is that the job market remains strong in Canada. This in itself is good news, but not when trying to calm the rampant consumption of goods and services and contain the increase in wages.

The labor market remains very tight. Employment has grown with surprising strength, the unemployment rate remains near historic lows and the number of job vacancies is high. Wages continue to rise at a rate of 4-5%, while productivity has fallen in recent quarters, writes the Governing Council of the Bank of Canada.

The next revision of the key interest rate will take place on April 12.

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