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Essentials of Monetary Policy

Bank of Canada Lives for the Pause

April 12, 2023
Randall Bartlett
Senior Director of Canadian Economics

As was widely expected, the Bank of Canada kept the overnight rate unchanged today, leaving the policy rate at 4.50%. However, the Governing Council maintained its hawkish tone in the press release, stating it “remains prepared to raise the policy rate further if needed to return inflation to the 2% target.”

The statement made clear that “recent data is reinforcing Governing Council’s confidence that inflation will continue to decline in the next few months.” However, elevated inflation expectations, strong wage growth and services inflation, and atypical business pricing behaviour are expected to provide an ongoing headwind to bringing high inflation to heel.

Digging into the details of the Monetary Policy Report (MPR), the forecast for 2023 annual real GDP growth was also revised higher to 1.4%, with notable upward revisions to consumption and exports. This was offset by a meaningful downward revision to 2024, from 1.8% to 1.3%, reflecting a more delayed impact of higher interest rates. 

A lot has happened since the January MPR. But most importantly, inflation has come down faster than the Bank had previously anticipated and financial conditions have tightened on the back of banking sector turbulence outside of our borders. Together, these look to have outweighed the sustained strength in the Canadian economy and labour market, and should work to ensure the Bank’s next move is a rate cut as early as the end of the year.

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