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Bank Of Canada To Maintain Interest Rates In Anticipation Of An Economic Downturn
Analysts anticipate that the Bank of Canada (BoC) will maintain interest rates at a 22-year high of 5% on Wednesday, following a contraction in third-quarter growth and a projected decline in the following year.
After increasing interest rates by a quarter point in June and July, the central bank has since put them on pause. It has also indicated its readiness to further tighten monetary policy in an effort to contain inflation, which has remained above the 2% target for the past 31 months.
Unexpectedly, Canada's economy contracted by 1.1% annually in the third quarter, averting a recession. However, the majority of economists predict that forthcoming mortgage renewals at higher rates will further reduce growth in the following year.
In October, inflation declined more than anticipated to 3.1%.
"It is highly probable that the Bank of Canada will maintain its policy rate at 5% this week," economists Royce Mendes and Tiago Figueiredo of the Desjardins Group wrote in a note.
"As time advances, mortgage renewals will become an even greater economic headwind. They predicted that this would cause the economy to weaken from balanced to feeble, with a brief recession occurring in 2024.
At 1500 GMT, the decision will be officially declared at 10 am ET. Thursday will see a speech by Deputy Governor Toni Gravelle elucidating the rationale behind the bank's actions, as well as a news conference.
The BoC anticipates that inflation will fluctuate at approximately 3.5% through mid-2024, before gradually declining to its objective of 2% by late 2025. Macklem speculated last month that interest rates might be at an all-time high, given the cessation of excess demand and the prognosis for prolonged periods of sluggish development.
The money markets are placing bets that a rate cut could occur as early as March, but Macklem has stated that the BoC is not even considering the possibility at this time due to the fact that inflation remains significantly above target.
As opposed to reducing interest rates, the Bank will persist in overtly discussing the potential for increases, Douglas Porter, chief economist at BMO Capital Markets, wrote in a note.
"A renewed rising crescendo of inflation would sound a sour note indeed for the 2024 outlook," said the economist.
As the economy and inflation decelerate, the BoC will begin reducing interest rates in the second quarter of the following year, according to a Reuters poll published last week.
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