Bank of Canada preview: Possible first rate pause in 12 months expected this week

After delivering eight consecutive rate hikes over the past year, the Bank of Canada is finally expected to leave rates unchanged when it meets this week.

In a statement from its January meeting, the BoC said, “…if economic developments evolve broadly in line with the [Bank’s] outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases.”

That guidance came into question soon after, however, when labour growth surprised to the upside with the creation of 150,000 new jobs in January.

“That wasn’t part of the central bank’s plan,” noted Royce Mendes, Managing Director and Head of Macro Strategy at Desjardins. Not only that, but U.S. inflation numbers suggested a re-acceleration in consumer price growth south of the border.

“Then the data began to cooperate,” Mendes wrote in a research note, pointing to Canadian inflation coming in below expectations for the second straight month and fourth-quarter GDP coming in flat, well below BoC forecasts of 1.3% growth.

As a result, “there’s little doubt the Bank of Canada will hold rates steady” at its upcoming meeting on Wednesday, Mendes suggested.

“The statement accompanying the decision will again leave the door open to further rate hikes if the economy or inflation veer off this path,” he added. “But central bankers will be able to credibly argue that both inflation and the economy have made as much progress as predicted back in January, if not more.”

In a survey of 22 banks conducted by Bloomberg, all expect the Bank of Canada to leave rates unchanged this week.

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