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The Bank of Canada held its key lending rate steady at 4.5 percent on Wednesday after last month becoming the first major central bank to pause its recent aggressive monetary policy to fight inflation. online news
But it said it was leaving the door open to further interest rate hikes if this is not “sufficiently restrictive to relieve price pressures” and bring inflation back down to its 2.0 percent target.
Desjardins analyst Royce Mendes commented in a research note that “while policymakers did acknowledge that banking sector turmoil outside of Canada’s borders had created some unforeseen challenges, they implied that the domestic economy is in a position to absorb it without undue stress.”
The collapse of Silicon Valley Bank last month panicked markets and set off a chain reaction that led to the failure of another regional American bank and the merger — under pressure — of Swiss investment banking giant Credit Suisse with regional rival UBS.
In a statement, Canada’s central bank pointed to a recent reacceleration in the economy which led it to upgrade its economic growth forecast for 2023 to 1.4 percent from 1.0 percent.
Economic growth in the first quarter, it said, “looks to be stronger than was projected in January, with a bounce in exports and solid consumption growth.”
Demand in Canada continues to exceed supply, while the labor market — with unemployment near a record low — remains tight.
But consumption, the bank predicted, will moderate this year and GDP growth will be weak through the remainder of the year before strengthening gradually in 2024.
Softening foreign demand, the bank said, is expected to restrain exports and business investment.
Global economic growth has been stronger than anticipated but is expected to weaken, it said. US growth notably is expected to slow considerably in the coming months, with particular weakness in sectors that are important for Canadian exports.
Inflation, meanwhile, has fallen from a peak last June of 8.1 percent and recent data, the bank said, has reinforced its confidence that inflation will continue to decline in the next few months.
“However, getting inflation the rest of the way back to two percent (from current 5.2 percent) could prove to be more difficult because inflation expectations are coming down slowly, service price inflation and wage growth remain elevated, and corporate pricing behaviour has yet to normalize,” it said.
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