The Bank of Canada is expected to hold its overnight rate at 4.5% on Wednesday, based on current economic conditions, particularly a larger than expected drop in the rate of inflation in January. .“I don't think that the Bank of Canada will change policy at the next meeting, continuing with the conditional hold is probably their strategy for right now,” Charles St-Arnaud, chief economist at Alberta Central and a former economist at the Bank of Canada, told Bloomberg..Additionally, at its last announcement in January, the bank said in a statement, “If economic developments evolve broadly in line with the Monetary Policy Report outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases.”.Several economists say the bank will keep an eye on developments in the US, as the Federal Reserve (The Fed), the equivalent to the bank, has been clear it will raise its rate, possibly twice this month and again in May. .Robert Kavcic, director and senior economist at BMO Capital Markets, said the real question is what happens next..“I think the bigger question and the bigger challenge that they're [the Bank of Canada] going to have is, ‘What happens after March?’” Kavcic told Bloomberg..“The Fed is probably going to be tightening at least two more times, if not more. For the Bank of Canada, if inflation remains sticky and if the economy does not break down, are they going to be able to sit there with the policy rates they have and pause as they suggested?”.Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets, told Bloomberg, markets are being proactive and are pricing in that The Fed will rates by 100 basis points and that’s “probably close to the limit” that the interest rate differential for Canada and the U.S. can widen to..There is a danger if the gap between rates in Canada and the US get too wide..Derek Holt, economist at the Bank of Nova Scotia says a large gap would weaken Canada's dollar against the US dollar, leading to inflation in Canada increasing even after the drop in January..“Canada’s central bank was able to tighten less than the Fed in previous cycles when core inflation north of the border was cooler, but that’s not the case right now,” said Holt in a note last week. “In Canada, inflation is still too hot, inflationary expectations are on the rise and the weakening loonie is flashing warning signs.”.The majority, 88%, of a panel of economists assembled by Finder.com believe the bank will hold its rate on Wednesday, with a consensus the bank will hold the rate for most of 2023..Taylor Schleich, strategist for National Bank of Canada, says a hold is in order as, “there are signs that rate hikes to date have been sufficient to cool the economy and bring inflation down.”.“The economy is likely to slow in subsequent quarters without further hikes, due to the lagged impacts of prior rate increases,” says Avery Shenfield, chief economist for CIBC..Tony Stillo, director of Canada Economics says, “the Canadian economy is very sensitive to interest rates because of elevated household debt and overvalued housing, and is likely already in the early stages of an emerging recession.”.Advocating for caution is Murshed Chowdhury, associate professor at the University of New Brunswick saying, "Although inflation remains high, the bank must assess the efficacy of its current tightening policy. Additionally, increasing rates further could pose a significant risk to economic growth and potentially trigger a recession.” .“The latest GDP figures indicate that the economy didn't expand in the recent quarter, which warrants the Bank to exercise greater caution.”.What Canadians want to know is how long before the rate of inflation is inside the bank's target of between 2% and 3%. .Most panellists believe “inflation is likely to remain sticky,” says St-Arnaud, “which is why reaching the target overnight rate won’t be achieved until next year, or later.”.Moshe Lander, senior economics lecturer at Concordia University, outlines a possible timeline..“The biggest interest rate increases occurred in mid-2022,” says Lander. “If it takes around 18 months for these interest rate increases to have maximum impact, then the effect of those moves should occur in late 2023. If inflation rates come down around .25% per month, then inflation will hit the upper band of the Bank's target range in early 2024.”.The full Finder.com report can be found here (https://www.finder.com/ca/bank-of-canada-interest-rate-forecast)
