By Steve Scherer and David Ljunggren
OTTAWA (Reuters) – The Bank of Canada on Wednesday left its key overnight rate on hold at 4.50% as expected, becoming the first major central bank to suspend its campaign against spiking inflation, given price pressures are easing as forecast.
Over the past year, the bank raised rates eight times in a row by a total of 425 basis points to tame inflation, which peaked at 8.1% last year and slowed to 5.9% in January, still almost three times the 2% target.
When the bank last met to set policy in January, it announced a 25 basis points hike and said it wanted to leave rates unchanged for a while to let previous increases sink in, as long as prices slowed in line with its expectations.
“Overall, the latest data remains in line with the Bank’s expectation that CPI inflation will come down to around 3% in the middle of the year,” the bank said in a statement.
“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 2% target,” the statement read.
The majority of the 32 economists surveyed by Reuters last week said the BoC would likely keep rates on hold through the end of this year, and all of them forecast the bank to stay on hold on Wednesday.
Before the announcement, money markets had expected the policy rate to stay unchanged but were pricing in another tightening by September.
While some data have been particularly strong since the bank’s last policy meeting, including a blockbuster January jobs report, gross domestic product stalled in the fourth quarter – far weaker than the 1.3% annualized growth forecast by the BoC.
In the statement, the bank acknowledged that fourth-quarter growth came in below its expectations, and dropped language saying the economy was in “excess demand”, words used twice when it announced the January rate hike.
“Restrictive monetary policy continues to weigh on household spending,” the statement said. “With weak economic growth for the next couple of quarters, pressures in product and labor markets are expected to ease.”
The central bank said core inflation measures and short-term inflation expectations still needed to fall in order to return inflation to target.
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(Reporting by Steve Scherer, editing by David Ljunggren; Reuters Ottawa bureau, +1 647 480 7921; david.ljunggren@tr.com)
