Bank of Canada keeps key interest rate at 5% in first decision of 2024. Here’s what’s next – The Globe and Mail

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The latest on Bank of Canada’s Jan. 24 interest rate decision

The Bank of Canada has its policy interest rate steady at 5 per cent for the fourth consecutive time. There was a notable change in the bank’s language, though, which downplayed the odds of further rate hikes and opened the door to the possibility of rate cuts.

The bank’s inflation and economic growth forecasts remained largely unchanged.

Find updates from our reporters and columnists below.

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12:30 p.m.

What’s next?

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Tiff Macklem, Governor of the Bank of Canada, and Carolyn Rogers, Senior Deputy Governor, hold a press conference at the Bank of Canada in Ottawa on Wednesday, Jan. 24, 2024.Sean Kilpatrick/The Canadian Press

  • The Bank of Canada’s next interest rate announcement is on March 6.
  • The U.S. Federal Reserve’s next rate announcement is on Jan. 31 Most economists expect the Fed to hold interest rates steady but will be watching for any changes of tone that hint at where U.S. monetary policy is headed.
  • Statistics Canada will publish January Consumer Price Index inflation data on Feb. 20. GDP data for November comes out on Jan. 31. The January Labour Force Survey will be released on Feb. 9.

Mark Rendell

12:05 p.m.

What BoC’s January decision means for the housing market

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Houses are seen in a neighbourhood on the side of a mountain, in Maple Ridge, B.C., on Thursday, August 17, 2023.DARRYL DYCK/The Canadian Press

The Bank of Canada’s softer message on interest rates could give prospective buyers more confidence to jump back into the real estate market.

Buy/sell, rent/lease residential &
commercials real estate properties.

Governor Tiff Macklem said the central bank’s discussion of monetary policy is shifting from whether its policy rate is high enough to beat inflation to “how long it needs to stay at the current level.”

That marks a shift from the bank’s message over the past six months, with Mr. Macklem and his team repeatedly saying they were prepared to hike the benchmark rate “further if needed.”

The real estate market already started to pick up at the end of last year, with national home sales surging nearly 9 per cent from November to December.

That spike in activity was the first increase since the summer, when the central bank surprised the market with back-to-back interest rate hikes.

With the busy spring season approaching, the real estate industry said the central bank’s comments Wednesday were an attempt to hold back the momentum that is building in the market after last year’s slowdown.

“They want to disrupt a potential surge in the housing market this spring but they have to stay within the realm of credibility,” said Shaun Cathcart, senior economist with the Canadian Real Estate Association.

The bank’s Monetary Policy Report noted that a jump in home prices would pose the risk of higher inflation.

The bank’s decision to keep the benchmark rate at 5 per cent will give current mortgage holders more time to deal with the higher rates they will face at renewal time.

Lenders say their borrowers are either adjusting by making higher monthly payments or selling their properties and discharging their mortgages.

Rachelle Younglai

11:45 a.m.

Thinking of choosing a variable-rate mortgage? Four things that could still derail the path to lower rates

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A real estate sign is displayed in front of a house in Toronto on Wednesday, September 29, 2021.Evan Buhler/The Canadian Press

For Canadians hoping to buy a house this spring and those who need to renew their mortgages soon, today’s rate decision bolsters the case for choosing a variable-rate mortgage, as they tend to move in lockstep with the Bank of Canada’s trendsetting rate.

That’s because the central bank has indicated it is now more focused on when to start lowering interest rates than whether it may need to hike them again.

But the bank’s Monetary Policy Report was a reminder of why going variable is never risk-free.

While the report warned that slower-than-expected economic growth could pull down inflation faster than forecast, it also outlined four main things that could still derail progress toward the bank’s 2-per-cent inflation target.

First, both consumers and businesses continue to expect inflation to remain quite high in the near future. This matters because, when it comes to inflation, collective beliefs can have a big impact on reality. The risk is that businesses will continue to hike prices and workers will continue to demand large wage increases if they anticipate persistently high inflation. This could slow the pace at which both prices and wage growth decelerate.

Another source of worry is that wages have been growing faster than productivity. Economists have linked this issue to Canadian businesses’ inadequate investments in technology and effective practices, among other issues. If the phenomenon persists, it too could become a factor impeding the descent toward 2-per-cent inflation.

Third, the Bank of Canada still sees a substantial risk that the housing market will regain steam. While the bank anticipates a modest increase in home prices as its base-case scenario, “this forecast is subject to a high degree of uncertainty,” it noted in the MPR. Home-price growth could pick up again if lower borrowing costs ignite stronger-than-expected demand while supply remains limited.

Finally, the bank referenced the Israel-Hamas war and attacks by Yemen’s Houthi rebels on ships in the Red Sea as factors that could push up both oil prices and shipping costs. If disruptions in the region spread, higher transportation costs for goods could fuel inflation once again, the bank said.

Erica Alini

11:30 a.m.

Here’s how economists are reacting to Wednesday’s hold:

Avery Shenfeld, managing director and chief economist of CIBC Capital Markets

The pick-up in growth projected for the back half of the year might well be tied to their own expectations for lower rates at that time, since the Governor noted that the meeting has shifted from a discussion of whether rates are high enough to one about how long they need to keep rates at 5 per cent. That’s a dovish tilt but is still consistent with our call for a first rate cut in June, with as much as 150 basis points of cuts on tap this year if, as we expect, we’ll need that to get the economy moving again after its current stall.

Stephen Brown, deputy chief North America economist at Capital Economics

The Bank of Canada’s decision to drop its tightening bias today is the first step toward interest rate cuts. We continue to think that the bank’s forecasts for the economy are too optimistic and that inflation will slow faster than the bank expects, leading us to forecast the first rate cut in April.

Royce Mendes, managing director and head of macro strategy at Desjardins Securities

We continue to believe that rate cuts will begin as early as April. The economy is facing a set of unique challenges in the form of the rising impact of mortgage renewals, slower population growth and CEBA loan repayments. As a result, central bankers should be able to begin easing policy to a less restrictive stance in the not-so-distant future.

Philip Petursson, chief investment strategist at IG Wealth Management

The statement continued along the narrative that the Governing Council wants to see further and sustained easing in core inflation while also highlighting that shelter costs remain the biggest contributor. If it weren’t for the already weakened Canadian economy, we may have taken this more seriously that this might suggest rate cuts are further out, but that’s not likely the case. Trying to read between the lines as to when the bank might initiate its first cut leads to a second-quarter target. To support the bank’s belief that household spending “will likely pick up” in the second half of 2024, we would need to see relief for the consumer. That relief can only come with interest rate cuts, given the current mortgage and rent burden. We are zoning in on the path to cuts – if not April then most certainly June.

James Orlando, director and senior economist, TD Economics

While the bank isn’t yet ready to signal a change in policy, markets are taking the lead. Odds are pointing to the first rate cut happening in April/June. We echo this sentiment. The BoC’s tight policy has caused the economy to flatline since last summer, which has quickly pushed the job market back into balance. Even the BoC’s quantitative tightening policy looks to have potentially gone too far, with market overnight rates continuing to drift from the bank’s target rate. With this alongside the realization that the BoC can’t set policy just based on elevated shelter inflation, it is clear that the central bank is getting ready to signal a rate cut in the coming months.

Benjamin Reitzes, managing director, Canadian rates and macro strategist, BMO Capital Markets

Perhaps the most important part of the statement is that the bank believes that the Canadian economy is now running in excess supply. That should be encouraging for policymakers, as it drives disinflationary pressure. … The rapid and sizable rate hikes over the past two years are doing their job, but it looks like we’ll be at 5 per cent for a while yet, as the BoC wants to see a further slowing in inflation. BMO’s call for a June start to rate cuts looks perfectly reasonable at the moment.

National Bank economists Taylor Schleich, Jocelyn Paquet and Warren Lovely

The BoC left its policy rate unchanged but did not retain its explicit hiking bias. This is somewhat surprising to us given the recent strength in core inflation measures; however, these pressures don’t appear to have meaningfully altered their outlook for inflation based on fresh forecasts. They also seem to be putting more weight on softening economic conditions, as the BoC now sees the economy operating in modest excess supply (a deterioration versus December’s characterization). On balance, the statement is marginally more dovish than we’d feared, and the shifting stance advances the process towards an eventual policy rate pivot. Our read of this statement gives us a bit more confidence in our forecast of an April rate cut.

Read more from economists, and the market bets for future rate cuts.

Darcy Keith

11:18 a.m.

Macklem on the possibility of future rate hikes

Macklem: “This risk of a rate hike is not zero. And indeed, in the opening statement, I was clear that if we saw renewed upward pressure on inflation – if we saw inflation going back up and we thought that was going to be durable – yes, we probably would have to raise rates further. … The message today, though, is that’s not our base case.”

Matt Lundy

11:02 a.m.

Macklem’s message to Canadians: ‘We’re not there yet’

Macklem: “The message to Canadians is we know Canadians want to see prices stop going up quickly. We know Canadians want to see interest rates come down. So do we. We want to see inflationary pressures ease further. We want to be convinced we’re on a path back to 2-per-cent inflation. And when we have more assurance that we’re on that path, we can start discussing lowering interest rates. But we’re not there yet. We’re concerned about the persistence in underlying inflationary pressures. And right now, the Governing Council’s judgment is that we need the policy rate of 5 per cent to take the remaining steam out of inflation. The bottom line is, monetary policy is working, largely as we expected. And we need to give it a bit more time to let it do its work.”

Matt Lundy

10:54 a.m.

Rogers on the effects of population growth on housing, rent

Bank of Canada senior deputy governor Carolyn Rogers: “In the short term, any increase in population – particularly in an environment of constrained supply – is going to put a bit of upward pressure on prices. And what’s happened in the Canadian economy over the last year is we had a particularly big surge in population growth through immigration. It came at a time when there was constrained supply. You can see this very clearly, most clearly really, in the housing sector, and in particular, in rents.”

Matt Lundy

10:49 a.m.

Macklem on getting inflation back to 2-per-cent target

Macklem: “We don’t think we need a deep recession to get inflation back to target. But we do need this period of weak growth. And what that has done is it has allowed supply to catch up. We think we’re now in modest excess supply.”

Matt Lundy

10:47 a.m.

Macklem on the immediate future of rate cuts

Macklem: “There was a clear consensus: It’s premature to be discussing cutting our policy rate. We need to see more progress before we have that discussion.”

Matt Lundy

10:45 a.m.

Macklem addresses shift in Governing Council’s policy discussions

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Bank of Canada Governor Tiff Macklem arrives for the annual meeting of federal, provincial, and territorial finance ministers in Toronto on Friday, December 15, 2023.Nathan Denette/The Canadian Press

In Governor Tiff Macklem’s opening statement, he outlined the shift in the bank’s internal discussions: “What came through in the deliberations is that Governing Council’s discussion about future policy is shifting from whether monetary policy is restrictive enough to how long to maintain the current restrictive stance. … I expect future discussions will be about how long we maintain the policy rate at 5%.”

Matt Lundy

10:40 a.m.

Analysis: Takeaway from Bank of Canada’s January interest rate announcement

Perhaps the biggest move from the Bank of Canada on Wednesday is what the central bank didn’t say: that it could raise interest rates further if necessary.

For months, the prospect of more tightening has lingered over the heads of consumers and businesses, even as financial markets and economists have shifted into an open debate about the timing of rate cuts. (The language in the BoC’s December decision: “Governing Council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed.”)

Those words were noticeably absent from Wednesday’s press release. Yes, Bank of Canada Governor Tiff Macklem was still using a cautious tone. “If new developments push inflation higher, we may still need to raise rates,” he said in his opening statement. At this point, that’s closer to an empty threat than a reality. Central banks don’t drop a key message from their press releases – especially when it’s as serious as the possibility of rate increases – unless something big has changed. Every word matters.

Effectively, the bank has slammed the door shut on additional rate hikes. Five per cent is the peak of this cycle.

Of course, the bank has good reason to exercise caution in its communications. Core inflation is proving tough to tame, and elevated wage growth is a persistent threat to prices. The bank’s updated forecast isn’t wildly different from its October one either; it still projects inflation will return to the 2-per-cent target next year.

Regardless, this is the clearest sign yet that the bank sees inflation on the right track and that lowering its policy rate is the next move on the horizon.

Some of the disinflation clearly stems from a weakening Canadian economy, which has stalled since mid-2023. The bank sees growth remaining around nil through the first quarter of this year before picking up speed.

All things considered, that wouldn’t be a terrible outcome for the economy after getting slammed by the highest inflation in four decades. A soft landing remains in sight.

Matt Lundy

10:35 a.m.

Markets react to the latest BoC interest rate decision

Market action was muted after the Bank of Canada held its policy rate steady Wednesday, as expected. The two-year bond yield eased lower from 4.05 per cent to 4 per cent before the announcement. It then briefly spiked to 4.04 per cent after the announcement but eased back to 4 per cent by 10 am.

How economists and market bets for future rate cuts are reacting to today’s BoC decision

There was even less movement in the five-year bond that goes a long way in determining mortgage rates. The yield moved lower to 3.48 per cent between 7 a.m. and 9:45, briefly jumped to 3.53 per cent after the announcement, then settled near 3.49 per cent at 10 a.m.

Scott Barlow

10:30 a.m.

The latest MPR forecast shows slightly lower inflation, marginally weaker growth

Inflation: The central bank sees annual Consumer Price Index inflation staying around 3 per cent through the first half of 2024, before falling to 2.5 per cent by the end of the year and back to the bank’s 2-per-cent target in 2025. This is largely in line with its October projection, although marginally lower thanks to declines in oil prices.

Economic growth: The bank has downgraded its economic growth forecast by a few ticks. It now expects the Canadian economy to have grown 1 per cent last year, down from its previous estimate of 1.2 per cent. It expects 0.8-per-cent GDP growth in 2024, compared with the previous estimate of 0.9 per cent. Bank economists see economic activity stalling over the next quarter but picking up around the middle of the year. The MPR projects healthy 2.5-per-cent GDP growth in 2025.

Mark Rendell

10:15 a.m.

Analysis: What does today’s Bank of Canada decision mean for borrowers?

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Shoppers walk past a vacant storefront on Saint-Catherine Street in downtown Montreal, Tuesday, Dec. 19, 2023.Christinne Muschi/The Canadian Press

The Bank of Canada’s sense of urgency on lowering interest rates is a disappointment for borrowers. Now, consider the upside.

Savers get to continue earning a decent return on their money, which is helpful for everyone from young adults saving for a down payment on a home to seniors trying to protect their retirement savings. But the pace of rate cuts is also a commentary on the state of the economy. No action by the central bank means inflation remains a bigger concern than a possible recession. This is huge for your finances because it suggests a degree of stability for jobs and incomes.

The outlook for our financial well-being is often tied to costs – rents, mortgage payments, daycare, groceries, new vehicles and such. But the income side of the equation is equally important. While an economic slowdown or recession might slow down the rising cost of living, it’s damaging to the job market. Expect layoffs, reduced work hours and minimal pay raises at best.

The job market has already worsened mildly, but it’s still in good shape by historical standards. The unemployment rate in December stood at 5.8 per cent, and the average hourly wage increase came in at 5.4 per cent on a year-over-year basis. Inflation was 3.4 per cent for the month.

While the Bank of Canada stands pat, interest rates for savers, investors and borrowers are changing fast

The next two rate announcements are set for March 6 and April 10. The Bank of Canada’s decision on both those days should be closely watched by everyone, not just borrowers. A quarter-point cut in the policy rate would be a calm and measured approach to removing the interest rate burden the economy is carrying right now. A half-point drop would say the bank is worried about the economy, which means you should be concerned as well.

Rob Carrick

9:45 a.m.

The Bank of Canada has held its policy interest rate steady for the fourth consecutive time and said monetary policy discussions have shifted from whether to raise borrowing costs further to how long the bank should wait before lowering them now that the Canadian economy has shifted into a state of “excess supply.”

The widely anticipated decision keeps the bank’s policy rate at 5 per cent, a two-decade high reached last July.

While the bank remained on hold Wednesday, there was a notable pivot in its language, which downplayed the odds of further rate hikes and opened the door to the possibility of rate cuts.

“With overall demand in the economy no longer running ahead of supply, Governing Council’s discussion of monetary policy is shifting from whether our policy rate is restrictive enough to restore price stability to how long it needs to stay at the current level,” Bank of Canada Governor Tiff Macklem said in a statement published alongside the rate announcement.

He did not rule out further hikes altogether but suggested they were unlikely if inflation and economic activity develop in line with the bank’s projections.

Read the full story on today’s BoC rate announcement.

Mark Rendell

9:15 a.m.
Open this photo in gallery:

Illustration by Pete Ryan

Over the past year, a team of about 20 Bank of Canada economists, aided by other staff researchers, have been working on a major overhaul of the bank’s workhorse macroeconomic models.

These are representations of the whole Canadian economy that the bank’s research team uses to produce quarterly forecasts for inflation and economic growth, and to test potential monetary policy choices.

Because interest-rate changes take up to two years to percolate through the economy and impact inflation, central bankers need to have a sense of where the economy will be in the future, and of how their own actions could affect that path. Model forecasts form the starting point for the governing council’s discussions about where to set interest rates, which happen eight times a year.

In what will be the largest revamp in nearly two decades, the bank intends to replace its two main macroeconomic models – the Terms-of-Trade Economic Model (ToTEM) and Large Empirical and Semi-structural Model (LENS) – with a new core model for forecasting and analysis.

It also plans to build a suite of additional models it calls satellites, which will act as a check on the main model’s assumptions, and a set of specialty models designed to address specific issues, such as financial stability risk or the economic impact of climate change.

If all goes to plan, these models will go live in mid-2025.

Read the full feature on Bank of Canada’s retooling plans.

Mark Rendell

8:50 a.m.

Markets aren’t looking for the central bank to move on borrowing costs, but will be watching for hints about how soon the central bank could start cutting rates. The Bank of Canada is also scheduled to release its quarterly monetary policy report.

Before the Bell: What every Canadian investor needs to know today

“We’re anticipating that the bank’s tone will be similar to December’s, as inflation metrics have deteriorated in the inter-meeting period,” Benjamin Reitzes, BMO’s managing director for Canadian rates and macro strategist, said.

“Since mid-year, the BoC has also highlighted that it’s focusing on supply/demand balance, inflation expectations, wage growth and corporate pricing behaviour. Last week’s Business Outlook Survey showed little to no improvement in those metrics, with corporate pricing behaviour somewhat encouraging on the path to normalization, but still not there.”

Terry Weber

8:20 a.m.

What do analysts and investors expect?

There is a clear consensus about what will happen today: All 34 economists polled by Reuters last Friday expect the Bank of Canada to keep its policy interest rate at 5 per cent.

Going forward, opinions diverge. Twelve of the economists polled think the bank will start cutting rates in April. The other 22 expect the first cut will come in June or later in the summer. On average, the economists expect four quarter-point rate cuts this year, which would bring the benchmark rate to 4 per cent by the end of the year.

Bond traders, meanwhile, have dialled back bets on an April cut after stronger-than-expected core inflation data for December. Interest rate swap markets, which capture market expectations about monetary policy, now put the odds of an April cut at around 55 per cent, according to Refinitiv data. Markets are pricing in four interest rate cuts by the end of the year.

Mark Rendell

7 a.m.

The Bank of Canada is expected to keep its policy interest rate steady at 5 per cent for the fourth consecutive time since July. The key is how central bank officials will talk about that decision.

With economic growth stalling and inflation hovering just above the bank’s control range, analysts expect the bank to start lowering interest rates in the coming quarters. What Governor Tiff Macklem and his team say today – in their rate announcement, news conference and quarterly Monetary Policy Report (MPR) – will set expectations for that timeline.

Financial markets put the odds of an April rate cut at about 50 per cent. The majority of Bay Street economists think the first cut will come closer to the middle of the year, likely in June or perhaps July.

The data since the last rate decision in December does not provide a clear roadmap one way or the other.

Economic growth is sluggish, job creation has stalled, and consumer and business sentiment are in the dumps. All this suggests that borrowing costs – currently at a two-decade high – are restrictive enough to get inflation back under control and that the central bank may need to pivot relatively soon to avoid doing undue damage to the economy.

At the same time, inflation and wage-growth data have come in stronger than the bank would like. Core inflation measures, which strip out the volatile components of the Consumer Price Index, moved higher in December and appear to be stuck in the 3.5-per-cent to 4-per-cent range – well above the bank’s 2-per-cent target.

If Mr. Macklem and senior deputy governor Carolyn Rogers focus on the stickiness of core inflation, it could be interpreted as a hawkish signal and lead traders to dial back bets on an April cut. By contrast, if they play up the sluggish economy or play down the possibility of further rate hikes, it would be read as dovish.

The MPR will contain new forecasts for inflation and GDP growth. Look for the bank to move up its timeline for getting inflation back to target. The October MPR saw inflation staying around 3.5 per cent until the middle of 2024, then falling to about 2.5 per cent in the second half of the year and returning to target in 2025. But in a December speech, Mr. Macklem said inflation would likely be “getting close to” 2 per cent in late 2024.

Other things to note:

  1. The rate announcement will be released at 9:45 a.m. ET instead of the usual 10 a.m. “This change is aimed at improving market functioning by removing a conflict with the North American timing of foreign exchange option expiry,” the bank said in December.
  2. The post-announcement news conference with Mr. Macklem and Ms. Rogers will take place at 10:30 a.m. ET, rather than the usual 11 a.m. Mr. Macklem’s opening statement will be published at 9:45 a.m., alongside the rate announcement.
  3. Analysts are watching for possible changes to the Bank of Canada’s Quantitative Tightening (QT) program: The process by which the bank is shrinking the size of its balance sheet by letting bonds it purchased during the first 1½ years of the pandemic mature without replacing them. Bank officials previously said they expect to end QT in late 2024 or early 2025. However, analysts have started questioning whether the bank may need to halt the process before then, after recent signs of strain in money markets that spurred interventions from the central bank earlier this month.

Read more about today’s Bank of Canada announcement.

Mark Rendell

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