The Bank of Canada has announced that it will maintain its policy rate at 5 percent, expressing concerns over the outlook for inflation. In a press release, the central bank stated that it needs to give higher interest rates more time to have an effect and does not want to undermine the progress made in the fight against high inflation.
The Canadian economy has shown signs of weakness, as previously projected by the Bank of Canada in January. While there was a 1 percent expansion in the fourth quarter of last year, following a contraction of 0.5 percent in the third quarter, the pace of growth remained weak and below potential. The decline in business investment contributed to the contraction in domestic demand, although growth was supported by a strong rise in exports.
The labor market has seen improvements, with the Bank of Canada noting that it has come into better balance. There are indications that wage pressures may be easing, as wage growth has been in the 4 to 5 percent range for some time. However, concerns remain about the potential for a wage-price spiral, where higher prices fuel higher wages and vice versa. The central bank is looking for further evidence that wage growth is moderating.
Despite these concerns, the unemployment rate fell to 5.7 percent in January, marking the first decline since December 2022. However, the January jobs report revealed a trend of more public-sector and part-time positions being created, while businesses slowed their hiring. The Bank of Canada stated that employment is growing more slowly than the population and job vacancies have returned to more typical levels.
In terms of the global economy, the Bank of Canada provided an update stating that U.S. growth has slowed but remained surprisingly robust and broad-based. This contrasts with the Canadian situation, where weaknesses persist. The central bank’s decision to maintain its policy rate reflects its commitment to addressing inflation concerns and allowing higher interest rates more time to have an impact on the economy.
Looking ahead, many economists expect the first rate cut to come in June. The Bank of Canada will continue to monitor economic indicators and assess the need for further action. The central bank’s cautious approach aims to strike a balance between supporting economic growth and addressing inflationary pressures, ensuring the stability of the Canadian economy in the face of both domestic and global challenges.
