Bank of Canada hikes rates, becomes first major central bank to signal pause


OTTAWA, Jan. 25 (Reuters) – The Bank of Canada raised its key interest rate to 4.5% on Wednesday, the highest level in 15 years, becoming the first major central bank to fight global inflation and saying it was likely to face further hikes postpone for now.

The 25 basis point increase was in line with analyst expectations. The bank raised rates at a record 425 basis points in 10 months to contain inflation, which peaked at 8.1% and slowed to 6.3% in December, still more than three times the bank’s target of 2%.

Governing Council members “clearly have enough confidence that the current tightening is already slowing the economy that they are comfortable not having to raise rates any further in most scenarios,” said Andrew Kelvin, chief Canada strategist at TD Securities. .

In its quarterly Monetary Policy Report (MPR), which includes new forecasts, the bank painted a picture of an economy stalling and could slide into recession in the first half of the year, pushing inflation to around 3% by mid-year and back to 2% in 2024.

“We are turning the corner on inflation,” Bank of Canada Governor Tiff Macklem told reporters. “We are still a long way from our goal, but recent developments have strengthened our confidence that inflation is coming down.”

Macklem said the bank would pause its policy action to assess the cumulative effects of the current interest rate level, adding repeatedly that the pause was contingent on the economy developing as predicted.

Money markets see the Bank of Canada cut interest rates as early as October.

“It’s really way too early to talk about cuts,” Macklem said. “The pause is really meant to give us time to assess whether we’ve raised interest rates enough to get inflation all the way back to target.”

The central bank had said in December that future rate decisions would depend on data, and a blowout of the December employment report released earlier this month highlighted the upside risk to wage and price growth.

“The Bank of Canada is using forward guidance again,” said Royce Mendes, director and head of macro strategy at Desjardins. “That’s likely to put a pause in the rate hike cycle for at least the next few months.”

While rising food and shelter costs are still weighing on households and headline inflation is still high, the bank said in its MPR that “3-month CPI inflation has fallen to around 3.5%, indicating a significant slowdown in inflation in the coming months.”

The Canadian dollar traded 0.3% lower at 1.3410 per dollar, or 74.57 cents. The 2-year rate fell by almost 6 basis points to 3.596%.

Additional reporting by Fergal Smith and Maiya Keiden in Toronto; Edited by Paul Simao, Mark Porter and Diane Craft

Our Standards: The Thomson Reuters Principles of Trust.

David Ljunggren

Thomson Reuters

Covers Canadian political, economic and general news, as well as breaking news in North America, formerly based in London and Moscow and a winner of Reuters’ Treasury scoop of the year.

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