By Steve Scherer and David Ljunggren
OTTAWA (Reuters) -The Bank of Canada on Wednesday left its key overnight interest rate on hold at 4.50% as expected and raised its growth forecast for this year, while dropping language that had warned of a possible recession.
The Bank of Canada (BoC) last month became the world’s first major central bank to pause its tightening campaign. Governor Tiff Macklem said he wanted to let the eight previous rate hikes sink in and would hold off on further increases as long as inflation came down as forecast.
All 33 economists polled by Reuters agreed that the bank would hold its key overnight rate steady. Inflation has been edging down, reaching 5.2% in February after peaking at 8.1%, but is still far above the bank’s 2.0% target.
“The Bank expects CPI inflation to fall quickly to around 3% in the middle of this year and then decline more gradually to the 2% target by the end of 2024,” it said in a statement, blaming services prices and wage growth for the slow decrease.
The BoC said it was still prepared to raise rates if necessary. Macklem, speaking to reporters after the policy announcement, said rates may need to stay high for a while.
“Governing Council discussed whether we’ve raised rates enough and we considered the likelihood that the policy rate may need to remain restrictive for longer to return inflation to the 2% target,” he said.
Previously the BoC had been less specific about when inflation would reach target, saying it would happen sometime next year. At the same time, the BoC raised its growth forecast for this year to 1.4% from 1.0% in January.
“Demand is still exceeding supply and the labor market remains tight,” it said, adding that growth would stay weak through the rest of the year. It dropped language from January saying there was a chance for “a couple of quarters with slightly negative growth”.
“There are some warning shots here” about possible tightening in the future, said Doug Porter, chief economist at BMO Capital Markets, citing the comments on demand outpacing supply and on the labor market. “On balance, I would still expect the bank to remain on hold for quite some time.”
While acknowledging there were tighter credit conditions in the United States and Europe because of the recent banking failures, the BoC said the situation was improving.
Deputy Governor Toni Gravelle last month said the BoC was “ready to act in the event of severe market-wide stress” in the financial system, adding that Canada was nowhere near that point.
The Canadian dollar was trading 0.1% higher at 1.3450 to the greenback, or 74.35 U.S. cents. Money markets still see the central bank’s next move being an interest rate cut.
The bank cut its 2024 growth forecast to 1.3% from 1.8% in January, and said the economy would expand by 2.5% in 2025.
Separately, the BoC said potential growth was expected to increase to 2.3% in 2023 from 1.4% in 2022, and it estimated that the nominal neutral rate of interest lay between a range of 2% to 3%, unchanged from its assessment in April 2022.
(Reporting by Steve Scherer and David Ljunggren in Ottawa; Editing by Mark Porter)
