© Reuters. FILE PHOTO: Governor of the Bank of Canada Tiff Macklem walks outside the Bank of Canada building in Ottawa, Ontario, Canada June 22, 2020. REUTERS/Blair Gable
By Steve Scherer and David Ljunggren
OTTAWA (Reuters) -The Bank of Canada on Wednesday left its key overnight interest rate on hold at 4.50% as expected and raised its growth forecast for this year, while dropping language that had warned of a possible recession.
Last month the Bank of Canada (BoC) became the world’s first major central bank to pause its tightening campaign. Governor Tiff Macklem said he wanted to let the eight previous rate hikes sink in and would hold off on further increases as long as inflation came down as forecast.
All 33 economists polled by Reuters agreed the bank would hold its key overnight rate steady. Inflation has been edging down, reaching 5.2% in February after peaking at 8.1%, but is still far above the bank’s 2.0% target.
“The Bank expects CPI inflation to fall quickly to around 3% in the middle of this year and then decline more gradually to the 2% target by the end of 2024,” it said in a statement, blaming services prices and wage growth for the slow decrease.
Previously the BoC had been less specific about when inflation would reach target, saying it would happen sometime next year. At the same time, the BoC raised its growth forecast for this year to 1.4% from 1.0% in January.
“Demand is still exceeding supply and the labor market remains tight,” it said, adding that growth would stay weak through the rest of the year. It dropped language from January saying there was a chance for “a couple of quarters with slightly negative growth”.
The BoC said it was still prepared to raise rates if necessary, and while acknowledging tighter credit conditions in the United States and Europe caused by recent banking stresses, it said the situation was improving.
“Funding costs for U.S. banks have increased, and concerns exist that conditions could deteriorate further,” it said. “More recently, financial markets have largely stabilized, and many indicators of financial conditions have improved.”
Last month, Deputy Governor Toni Gravelle said the BoC was “ready to act in the event of severe market-wide stress” in the financial system, adding Canada was nowhere near that point.
