| 7 December 2023, Thursday |

Bank of Canada seen on hold even as economy accelerates

Analysts predict that the Bank of Canada will take the unexpected recent economic strength in stride and leave interest rates steady at its meeting on Wednesday, resting its expectations on activity moderating as higher borrowing costs take effect.

After raising its benchmark rate to a 15-year high of 4.50% last month, the Bank of Canada became the first major global central bank to suspend its rate-hiking campaign. It stated that no more tightening would be required if the economy slows or even enters a small recession, as expected.

While inflation has cooled in recent months, other economic indicators are pointing to an economy that is picking up pace from a sluggish fourth quarter.

Preliminary data last week showed that gross domestic product (GDP) rose by 0.3% month-over-month in February, building on a stronger-than-expected 0.5% gain in January. Employment data for March showed a seventh consecutive job gain.

“The economy is showing renewed momentum, with more people working and seeing their incomes rise,” said James Orlando, a senior economist at TD Economics. “They are out spending again. This will carry through to higher economic growth.”

That is welcome news for most, but not for Bank of Canada (BoC) Governor Tiff Macklem, as it could call into question his decision to announce a conditional rate pause in January.

Macklem is seeking to rebuild public trust after facing criticism for acting too slowly to tame inflation, which spiked after pandemic restrictions were lifted. The central bank has admitted to having initially misjudged the price pressures.

That effort could be complicated by Prime Minister Justin Trudeau’s recent budget, which has outlined billions of dollars in new spending.

  • Reuters