The Bank of Canada held true to its conditional pledge in January, leaving its benchmark interest rate unchanged at 4.5 per cent at its March 8 policy decision.

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Will a more hawkish Fed force Bank of Canada's hand? What economists say about the first rate hold in a year Back to video

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It’s been a year since the bank launched an unprecedented campaign of consecutive interest rate increases — 425 basis points since starting in March 2022.

Economists weren’t surprised by the hold. TD Bank’s James Orlando called today’s decision a “placeholder meeting.”

Now the question is what happens next?

Hints could lie in what some economists interpreted as the “hawkish tone” of the bank’s statement.

Stephen Brown, economist for Canada at Capital Economics, said in a note to clients that the change in the bank’s language from “expects” to “will continue to assess economic developments …” could point to the bank having lost confidence that the increases it has under its belt will be enough to bring inflation down to two per cent.

Another rate hike could be in the cards, acknowledged economist Charles St-Arnaud of Alberta Central, in his note.

“The risks are tilted towards another hike if inflation proves sticky and the labour market remains tight,” he said.

Inflation currently stands of 5.9 per cent and the next reading will be on March 21.

Several analysts also wondered what role a more hawkish U.S. Federal Reserve could play in future Bank of Canada decisions.

If the Federal Reserve’s target rate moves 100 basis points higher than the Bank of Canada’s, that could “force the BoC to hike rates to avoid a much weaker CAD (Canadian dollar) and higher import prices,” said Tony Stillo of Oxford Economics in a note.

Here is what economists are saying about the Bank of Canada’s statement and what it means for interest rates.

Charles St-Arnaud, Alberta Central

“The key message in today’s decision is that the central bank expects interest rates to remain on hold for some time. However, it clearly states that it remains ready to hike again, if inflation does not ease as expected, continuing to show a strong commitment to restoring price stability. This suggests the BoC could hike later this year if underlying inflationary pressures prove stickier. On that, the BoC notes that while recent dynamics in measures of core inflation have moderated closer to its objective, further easing will be required.

“Today’s decision supports our view that the BoC is likely done with its tightening. However, the risks are tilted towards another hike if inflation proves sticky and the labour market remains tight, leading to elevated wage growth.”

Douglas Porter, BMO Economics

“On balance, there isn’t much new information here on the BoC’s assessment of the economy. However, perhaps the key takeaway is that the bank seems to have subtly loosened any commitment to stay on pause, as the forward-looking language simply refers to the need to continue to “assess economic developments”. Clearly, the bank wants to keep its options open if inflation doesn’t go their way and/or if the job market continues to sizzle. Of course, the much more hawkish message from the Fed, and the related drop in the Canadian dollar, has heightened the need for optionality. The BoC will now be data dependent, and if the recent strong momentum persists, look for the tone to toughen in the coming weeks.”

Warren Lovely and Taylor Schleich, National Bank of Canada Economics

“To this point, growth and inflation data has come in line with or below what the Bank had pencilled into their latest MPR (Monetary Policy Report), which is acknowledged in this new rate statement. We’d also note that references to ‘excess demand’ are gone, implying that rate hikes are working as intended. However, while this statement referenced January’s guidance, we’d highlight that Governing Council didn’t exactly reassure us that, going forward, it ‘expects to hold the policy rate at its current level.’ Nonetheless, at least based on the domestic economic outlook (relative to January’s MPR), we do believe this pause can be sustained. As such, we will be looking for another ‘no change’ decision next month, conditional on the continued co-operation in economic/inflation data that we expect to see.”

Stephen Brown, Capital Economics

“The policy statement struck a somewhat hawkish note, stressing that the stagnation in fourth-quarter GDP was largely due to the slowdown in inventory building, whereas ‘the labour market remains very tight.’ The Bank also acknowledged that, although commodity prices have developed broadly in line with the bank’s assumptions since the January meeting, the ‘strength of China’s recovery and the impact of Russia’s war in Ukraine remain key sources of upside risk.’ While the bank told us in January that the ‘Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases,’ the language this time was altered to say that ‘Governing Council will continue to assess economic developments and the impact of past interest rate increases, and is prepared to increase the policy rate further if needed to return inflation to the two per cent target.’

“Dropping the explicit hint that it intends to keep policy unchanged could be a sign that the bank has lost confidence that its 425 basis points of rate hikes over the past year will be enough to get inflation back to target on a sustained basis. Nonetheless, as the popularity of variable rate mortgages means higher interest rates are feeding through to the real economy faster than elsewhere, and the January consumer price index data were also encouraging, it still seems unlikely that the bank will be forced to resume raising rates. The bigger risk to our forecasts is that the Bank may not be prepared to cut them as soon as we expect, at the end of this year.”

Jay Zhao-Murray, FX analyst,Monex Canada

“We are not convinced that the bank will necessarily resume its tightening cycle, despite the recent hawkish reassessment from peer central banks but we do believe that the bank’s bias tilts in a hawkish direction. Looking to the bank’s next decision in April, only one single consumer price index report and two additional jobs reports are set for release ahead of the meeting. It is unlikely that this would be enough data to materially shift the outlook, and as such, we don’t expect the bank to drop its current wait-and-see approach in April. With further disinflation expected in H2 (the second half of the year) as economic stagnation weighs on firms’ pricing power, we agree with market expectations that the risk of a resumption to the hiking cycle is largely isolated to the June meeting. Following the announcement, the loonie slipped against the dollar by a tenth of a per cent – a marginal move in the context of recent reactions to monetary policy decisions in major FX (foreign currency) pairs (two currencies coupled for trading).

James Orlando, TD Economics

“Today was always set to be a placeholder meeting. The BoC had clearly communicated it would hit pause its hiking cycle and let the economy absorb the impact of 425 basis points of monetary policy tightening over the last year. The only thing to analyze was how firm the BoC would be on reinforcing the possibility of further hikes should incoming data prove stronger than expected. Today’s announcement shows that the BoC isn’t in a rush to start hiking again.

“The BoC’s actions over the last year have been effective in reining in inflation, with (the) consumer price index expected to move from 5.9 per cent year-on-year in January, to three per cent this summer, and potentially towards two per cent later this year. Higher rates have also taken a big bite out of the interest rate sensitive parts of the economy, with the real estate market still in the process of finding a bottom.

“The issue is that this hasn’t played out in the broader economy. There has been a significant upswing in the jobs market, with employers hiring at a breakneck pace. This is happening alongside a massive surge in government payouts to households, filling the wallets of Canadians and sending them on a spending spree. This is juicing the economy at a time when the BoC needs to see the opposite. Should this momentum continue, it could cause inflation to spike again, forcing the BoC back into hiking mode in the coming months.”

Andrew Grantham, CIBC Capital Markets

“The Bank of Canada needs a clearer picture on growth and inflation prospects to decide if it needs to hike again or more definitively set aside that prospect, and with so little time since its last decision, it simply doesn’t have enough data to make that call. Hence, to no surprise, the Bank opted to leave its policy rate unchanged, maintaining its language that while it expects this will be a lasting pause, the door is open to a further hike if necessary. The statement cites the combination of growth that has come in below expectations and some signs of easing inflation, but a labour market that is too tight, and some ways to go to get inflation back to target. Canadian yields had edged up a bit in recent days, and some of that could be reversed as the bank gave no hints that it is feeling under pressure to change its messaging in the face of a more hawkish sounding Fed and some weakening in the (Canadian) dollar.

Josh Nye, RBC Economics

“This was easily its least anticipated decision in more than a year with the BoC having clearly signalled a pause in January and set a fairly high bar to resume tightening. Six weeks was simply too little time to see “an accumulation of evidence” in favour of a restart, and in any case data over that period was mixed. That led to a fairly balanced if not slightly dovish policy statement with the BoC reiterating a conditional pause, and maintaining a tightening bias but not sounding inclined to act on it.”

Tony Stillo, Oxford Economics

“The Canadian economy performed poorly in Q4 and the full impact of higher interest rates on highly indebted households and housing is still to come. Contrary to the BoC’s expectation for a mid-year stall in the economy, we believe a recession is now emerging.

“Despite the recession, we expect the bank will hold rates steady at 4.5 per cent through 2023 before easing to a neutral setting in 2024 once it’s convinced that inflation is sustainably back at its two per cent target. However, we are keeping an eye on expected Fed hikes in the U.S. policy rate. Aggressive rate increases by the Fed might put pressure on BoC to also raise rates. But we expect the BoC will likely remain on hold unless the Fed funds rate moves to the 5.5 per cent range – pushing the spread to 100 basis points – and forcing the BoC to hike rates to avoid a much weaker CAD (Canadian dollar) and higher import prices.

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