Bank of Canada holds key interest rate at 5% again, saying it's still too soon for rate cuts

The Bank of Canada has held its key interest rate at fiveper cent again,saying that it's still too soon to consider rate cutswhile underlying inflation persists.

Economists were widely expecting the central bank to hold the rate. The bank said in a note on its website that it was still concerned about underlying inflation, whichstrips out volatile items likefood or fuel.

Bank of Canada governor Tiff Macklemelaborated on those concerns during a press conference following the announcement.

He said there are still global risks like the attacks on Red Sea shipping routes, which have impactedglobal shipping costs that could feed into higher inflation if they escalate.

WATCH | Macklem explains why the bank cares about core inflation:

'Why do we care about core inflation?' Bank of Canada governor explains

6 months ago

Duration 1:54

Tiff Macklem, governor of the Bank of Canada, says core inflation which strips out volatile parts of the consumer price index gives the bank a sense of where the trend is.

Domestically, "we are seeing a gradual easing in underlying inflationary pressures. The risk is that stalls," he said. "We don't want inflation to get stuck, materially, aboveour [2 per cent inflation] target."

The central bankexpects inflation to stay close to threeper cent during the first half of this year before it slowly eases.

Higher interest rates need 'more time,' says Macklem

In his prepared remarks, Macklem said that there have been "no big surprises" since the Bank last held an interest rate announcement in January.

While the Canadian economy has staved off a recession, 2023 was one of its weakest recent years for growth. GDP increased by an annualized rate of one per cent in January.

Meanwhile, inflation came down to 2.9 per cent in January as price growth slowed. Groceries were still getting more expensive, but at a slower rate.

WATCH | Inflation has eased. Why isn't the bank cutting interest rates?

Inflations down. So where are the interest rate cuts?

6 months ago

Duration 4:14

After two years of aggressive interest rate hikes, inflation is seemingly back under control, causing many Canadians to start asking: Wheres the relief? CBCs Peter Armstrong looks at whether the Bank of Canada has accomplished its goals and what we know about when rates could start to come back down.

"The assessment of the governing council is that we need to give higher interest rates more time to do their work," said Macklem.

The Bank of Canada has maintained that it takes about 18 to 24 months for interest rate changes to work their way through the economy.

"It would be great if this worked faster, it would be great if it was less painful. But unfortunately, monetary policy, it does work slowly," Macklem said later, while taking questions from reporters.

"It is an indirect channel. It's got to work through the economy. It takes time to do that."

'Don't want to give a false sense of precision'

Macklem reiterated on Wednesday that, in January,the bank couldn't rule out the need to raise rates should inflation unexpectedly rise, but thatdiscussions had shifted from whether policy was restrictive enough to how long it would have to stay at its current level.

It's still too early to consider lowering the rate, he said. Future progress on inflation is expected to be gradual and uneven.

"We want to give Canadians as much information as we have, but we also don't want to give a false sense of precision," Macklem said during the Q&A period.

The central bank last raised the key interest rate in July and has held it at 5 per cent on five occasions since.

The bank first raised interest rates in March 2022, the beginning of an aggressive campaign to cool inflation that resulted in 10 rate hikes in less than two years.

Meeting more 'hawkish' than expected, says economist

"This was a meeting where they were just very reluctant to talk about cutting rates," said Veronica Clark, an economist with Citi Bank. "It is a bit more hawkish than I was expecting."

Many economists are expecting a first rate cut in June. Clark who anticipates the first cut will come in July said she thinks the central bank will make a move once it sees that the three-month core inflation rate is holding within the bank's target range.

WATCH | Not the right moment to cut rates, says Macklem:

'There will come a time' to cut rates but it's not now, Macklem says

6 months ago

Duration 2:23

Bank of Canada Governor Tiff Macklem says progress is being made in tackling inflation, but stressed that the bank doesn't think this is the right moment to cut interest rates.

Clark added thatwe might only see one or two cuts this year. That will largely depend on how quickly the U.S. Federal Reserve cuts its own key interest rate, she said.

"We also do think thatby the middle of the year, you will see some weaker [economic] activity data in the US," she said, adding that she expects the U.S. to fall into recession by that time.

"That almost certainly would mean much weaker activity for Canada also," Clark said.

'It's been impossible,' says couple who bought in 2021

Those rate cuts can't come soon enough for some Canadians.

Dan and Maggie Dumouchel, who live in Maple Ridge, B.C., with their two daughters, are variable rate mortgage holders. They bought a single family home in 2021 during a period when the cost of those properties had dipped in the market.

When interest rates started rising, the couple considered locking their rate but because they were recent buyers, the penalty to lock in at a higher rate would have been up to $15,000. They opted not to.

"I kind of wish we did pay it because we're paying probably an extra $30,000 a year in mortgage now," said Dan.

The family has cut back where they can they get their groceries from the food bank, they've pulled their daughters out of extracurricular sports, and they've stopped eating out and going to the movies.

But the central bank has 'taken my savings, they've taken the last two years of my life,' said Maggie.

"We stay home and we eat popcorn. We eat bad food from the food bank and we don't do anything else because we can't afford it, because the [central] bank has done this to us," she said.

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The Dumouchels both work in the hard-hit film industry and lost their jobs amid the Hollywood strikes last summer. Dan's last job was in June 2023. Maggie was laid off in July and is now employed again, but makes $11 less per hour than her previous job.

"It's been impossible like, devastating for us to try to stay here with the rates as high as they've been," said Dan. "We've gone through all of our savings."

"I just feel like the Bank of Canada only has one tool. When your only tool is a hammer, everything looks like a nail, and it's just, it's really unfair."