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BoC expected to hold interest rate this week, even as economy keeps some steam

The central bank is set to announce its next interest rate decision on Wednesday
Bank of Canada governor Tiff Macklem during a visit to Vancouver

The Bank of Canada is expected to hold its key interest rate steady this week as inflation continues to slow, despite other data suggesting the economy is still running hot. 

The central bank is set to announce its next interest rate decision on Wednesday. The announcement will be accompanied with updated economic projections for growth and inflation in its quarterly monetary policy report. 

BMO chief economist Douglas Porter said although the economy is growing faster than anticipated, lower-than-expected inflation will convince the Bank of Canada to hold its key interest rate at 4.5 per cent.

"When we combine all these things together, it certainly looks like the (central) bank is likely to hold rates steady for now," Porter said. 

For months, the economic data that the Bank of Canada relies on for its interest rate decisions has been sending mixed signals on the state of the economy.

So far this year, growth and job numbers are coming in stronger than expected, even as the Bank of Canada's key interest rate sits at its highest level since 2007. 

After contracting slightly in December, real gross domestic product grew by 0.5 per cent in January. Statistics Canada's preliminary estimate suggests the economy grew again in February by 0.3 per cent. 

CIBC executive director of economics Karyne Charbonneau says a closer look at the economic growth numbers, however, shows that there may not be too much cause for concern.

"Some of the strength that we see in GDP seems to be the unwinding of some supply disruptions, which is actually a good thing for inflation," Charbonneau said. 

Meanwhile, businesses keep hiring. In March, the Canadian economy added 35,000 jobs, bringing the total number of jobs gained over the last six months to almost 350,000. 

The unemployment rate also held steady at five per cent for the fourth consecutive month. That's just above the all-time low of 4.9 per cent reached in the summer. 

While this ongoing strength in the economy is not necessarily what the Bank of Canada wants to see, lower inflation is serving as good news. 

In February, Canada's annual inflation rate fell to 5.2 per cent, marking the second month in a row inflation came in lower than forecast. The slowdown in overall inflation comes as supply chains recover and commodity prices moderate.

The month-over-month inflation data shows inflation is actually tracking much closer to the Bank of Canada's inflation target of two per cent.

Given the rapid rise in prices largely occurred in the first half of 2022, Canada's inflation rate is expected to fall significantly in 2023, with most economists forecasting it will to fall to about three per cent by mid-year.  

As long as inflation continues to fall as expected, the Bank of Canada doesn't plan on raising interest rates further. It declared a conditional pause on rate hikes earlier this year, but kept the door open to more rate hikes if needed.

The Bank of Canada appears cautiously optimistic that its aggressive rate hikes between March 2022 and January 2023 — which saw its key interest rate rise from near zero to the highest it's been since 2007 — will be forceful enough to quell inflation. 

The effect of higher interest rates, which can take up to two years to be fully felt in the economy, is expected to continue broadening out in the economy and hamper growth.

Recent surveys conducted by the Bank of Canada also show consumers and businesses are gearing up for a slowdown. Consumers reported plans to cut back on travel and restaurant outings to save money. Meanwhile, businesses expect their sales to slow. 

And although labour shortages were still a top concern for businesses, the survey found signs of both the labour market and wage growth easing.

"The survey results are actually showing that the interest rate hikes are working," Charbonneau said. 

"I think all of this is encouraging."

This report by The Canadian Press was first published April 7, 2023.

Nojoud Al Mallees, The Canadian Press