BoC rate hold signals confidence in current policy, analysts say

The central bank's current strategy gives it sufficient room to manoeuvre should a recession materialize

BoC rate hold signals confidence in current policy, analysts say

The Bank of Canada’s latest decision to keep its benchmark lending rate frozen at 5% indicates its confidence in the policy’s ability to keep bringing inflation ever closer to its 2% target – but this will come at the cost of shrinking the economy, according to Marie-France Benoit, Avison Young principal and director of market intelligence for Canada.

“We are predicting high interest rates will keep GDP growth in negative territory until spring 2024, and this will create short-term headwinds for the real estate market,” Benoit said after the central bank’s announcement yesterday.

“On a more positive note, we also believe that 5% marks the peak for interest rates. A stable policy rate means that real estate investors can now look forward to more predictable financing conditions.”

The BoC’s current strategy will give it sufficient room to manoeuvre to lower rates should a recession fully materialize, Benoit added.

“[This] will favour those who have weathered this period of turbulence and have the dry powder to invest,” she said.

“Hiking bias” still apparent, RBC says

The BoC’s language in its announcement maintained a clear “hiking bias”, according to Royal Bank of Canada (RBC).

“‘Inflationary risks have increased,’” RBC quoted the central bank as saying. “‘[We are] prepared to raise the policy rate further if needed.’”

Still, RBC is not projecting any additional hikes for the rest of 2023.

“Data over the summer showed persistent signs that the economy has already been softening,” RBC said. “That was also acknowledged by the BoC in [its] statement, alongside a mention of slowing trends in labour markets as hiring demand cools and the unemployment rate edges higher.”

Taking sticky inflation expectations into account, the BoC will almost certainly tread with heightened caution when it comes to bringing down its policy rate.

“We expect the overnight rate will be held at 5% through the first half of next year, with modest rate cuts to follow starting in Q3 2024,” RBC said.

“Slower than expected progress is a concern. But evidence continues to build that interest rates are already restrictive enough to continue to cool the economy, and alleviate price pressures. Indeed, consumers in the coming quarters are expected to further cut spending as more of them contend with rising borrowing costs.”