The Bank of Canada is now shifting its focus towards the possibility of cutting interest rates, according to Governor Tiff Macklem. This comes as the central bank decided to maintain its key rate at five per cent, a move that wasn't surprising given the weaker economic growth and slowing inflation. Macklem highlighted the shift in discussions from whether the policy rate is restrictive enough to restore price stability to how long it needs to stay at the current level.
The decision to keep the key rate steady was expected, allowing the bank to observe how the economy responds to the existing higher rates. Economists were eagerly awaiting any signs of a potential pivot to rate cuts. Royce Mendes, managing director at Desjardins, noted that the central bank's pivot was "as much as anyone could have hoped for." While the messaging shifted, Macklem reiterated that the bank is still open to further rate hikes if inflation doesn't cooperate. The central bank's focus on signaling to Canadians that more rate hikes are unlikely was seen as the right call by Mendes. He emphasized the need for time for the existing high-interest rates to work their way through the system .In addressing concerns about inflation,
Macklem emphasized the continued worry about elevated inflation. The annual inflation rate in Canada rose to 3.4 per cent in December, with shelter costs identified as the main contributor. However, some economists, like TD chief economist Beata Caranci, found the focus on shelter costs surprising, given the limited influence the central bank has on this aspect. Macklem acknowledged that shelter costs are affected by structural barriers to homebuilding and strong population growth. Despite the expectation of weakness in the Canadian economy, the Bank of Canada's latest forecasts suggest a potential rebound in the second half of the year, with inflation expected to return to two per cent by 2025. The forecasts remain largely unchanged from October.
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