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It’s been almost a year since the Bank of Canada began aggressively raising its key overnight lending rate. Since then, Canadian families have struggled to pay off ever-increasing debt. Borrowing costs have risen by 425 basis points in the past 12 months.
But the days of endless rate hikes may be near. On Wednesday, the Bank of Canada unveiled its latest interest rate policy. Many expect it to make good on the promise of clicking the pause button.
“The bank will likely hold overnight key rates at 4.50 per cent on March 8,” said James Laird, CEO of Ratehub.ca and president of CanWise Financial.
In January, the central bank raised its key interest rate to 4.5 percent, but also signaled it was ready to end its year-long rate hike streak.
“If economic development is progressing broadly in line with the MPR [Monetary Policy Report] perspective, the Governing Council expects to hold the policy rate at its current level while assessing the impact of interest rate increases,” the Bank of Canada wrote in its official statement.
That is a very important caveat.
Since the last decision of the bank on Jan. 25, we saw jobs numbers, GDP data, home sales figures and inflation numbers.
Inflation is down significantly from last summer’s peak
The consumer price index has spent most of the past few decades hovering between one and two percent. As the effects of the COVID-19 pandemic began to take hold, inflation began to rise.
At first it was dismissed by many as “just a moment.” But prices didn’t get the memo and just kept going up. The annual rate ended at 8.1 percent last June.
Meanwhile, central banks everywhere were raising interest rates aggressively. Global supply chain problems were under control, and the global oil price had begun to fall from its peak after Russia invaded Ukraine one year ago.
Last week, the CPI fell to 5.9 percent annually. Short-term trends were even slower.
Food prices are still very high, but the overall trend has been seen as positive by economists such as TD’s Leslie Preston.
“This was another step in the right direction with inflation, so I was relieved to see it going in the right direction,” Preston told CBC News.
Recently, we have seen Canadian economic growth data weaker than expected.
A weak pro-GDP case for a freeze on inflation
GDP growth slowed in the fourth quarter of last year. Economic growth is nearing the end of the year, coming in at zero percent.
The monthly numbers for December actually showed a contraction. That means businesses haven’t sold much and consumers have backed off.
Although it may seem counterintuitive, that bad economic news may be the good news mortgage holders have been waiting for.
“[This] A much softer report will not disappoint policymakers, as the Bank of Canada is clearly trying to get the economy out of the economy,” wrote BMO chief economist Doug Porter. as little steam as one could ask for.”
So, he said, the GDP numbers “reaffirm” that the Bank of Canada will not raise rates when it announces its rate decision on Wednesday.
“And if growth remains below capacity – as we expect – it will likely remain on the sidelines,” he wrote to clients.
Profits are up again at Canada’s largest food retailer. Parent company Loblaw says it earned about 12 per cent more in the last quarter compared to the same period last year, raising eyebrows among Canadians facing high food costs.
RBC chief economist Claire Fan admits the bank is confident it will maintain its expected stance next week.
Going forward, he said, the job market will be one of the things to watch.
The job market is red hot at the Bank of Canada
Canadian employers added 150,000 jobs in January. That was ten times what economists had expected.
A consensus of economists believe another 5,000 jobs will be added when February numbers are released on Friday.
The fan said the problem is not just the amount of additional jobs; whether wage growth continues in moderation.
Wages have never increased as prices have increased. So workers have lost purchasing power in the last two years. Statistics Canada found wage growth rose last November to 5.6 per cent.
There are signs that the Bank of Canada’s easing plan is working as gross domestic product stagnated, with a slight dip in December, according to new data from Statistics Canada. That could mean a break from rising interest rates for struggling consumers.
Earnings are now stable at around 4.5 percent or so.
Manfaneli said the central bank will look into that in order to balance it further. “If it’s going to go down, that’s enough to keep the Bank of Canada where it is,” he told CBC News.
So GDP decreases, inflation decreases and wage growth is reduced.
None of this is particularly good news for workers. But economists agree it should be enough to convince the Bank of Canada to make good on its suspension and finally give some relief to households struggling with rising debt payments and mortgage renewals.