Tuesday March 5, 2024

Despite falling inflation, the Bank of Canada is likely to keep interest rates steady, raising questions about an immediate drop in borrowing costs.

Editorial Cartoon by Graeme MacKay, The Hamilton Spectator – Tuesday March 5, 2024

A Closer Look at the Bank of Canada’s Interest Rate Strategy

September 8, 2023

In his recent article Mark Rendell delves into the Bank of Canada’s decision to maintain its interest rates, despite the recent decline in inflation. Rendell suggests that there is optimistic chatter about the potential reduction in borrowing costs due to the decreasing inflation rate. However, he questions whether this optimism is well-founded.

The Bank of Canada, according to Rendell, is expected to hold its policy rate at 5 percent for the fifth consecutive rate announcement. Despite a previous trend of increasing borrowing costs in 2022 and the first half of 2023, the bank has maintained a hold since July, waiting for sluggish economic activity to bring inflation back within the target range. Governor Tiff Macklem, in a departure from previous statements, indicated in January that additional rate increases are unlikely. However, he refrained from providing a timeline for rate cuts, emphasizing the importance of clear downward momentum in core inflation measures.

The Globe & Mail: Bank of Canada expected to hold rates steady, even with inflation back in target range 

Yesterday’s announcements highlight the challenges of high inflation and housing costs in Canada. The report on food banks shows the growing need for affordable options, while the Bank of Canada's focus on managing inflation could lead to rate hikes. It's clear that addressing affordability, inflation, and social support is crucial.

October 26, 2023

Rendell questions the prevailing notion that declining inflation will automatically lead to lower borrowing costs. He points out that interest rates may remain where they are, causing enduring pain for those who have become accustomed to paying relatively low amounts on loans and variable-rate mortgages.

The article highlights the mixed data that the Bank of Canada is currently evaluating, with economic growth in Canada being weak but avoiding the recession predicted by many economists. The inflation rate dropped to 2.9 percent in January, a significant improvement from the 8.1 percent in mid-2022. However, shelter inflation remains a concern, rising to 6.2 percent in January.

As the Bank of Canada contemplates easing monetary policy, the challenge lies in the balancing act of addressing shelter price inflation and a volatile real estate market. While interest rate cuts could provide relief to homeowners, they might also drive home prices higher, further challenging housing affordability.

October 22, 2019

Analysts predict that the central bank may start lowering interest rates around mid-year, possibly in June, but the article warns that 5 percent is not historically high. Any rate reduction is expected to be gradual and slow, nowhere near as low as before. The author advises people to get used to this level and spend within their means.

In conclusion, despite the optimistic narrative surrounding the decline in inflation, Rendell’s article suggests that the Bank of Canada’s cautious approach to interest rates may not guarantee an immediate reduction in borrowing costs. The article encourages readers to critically evaluate the potential impact of interest rate decisions on the broader economic landscape and individual financial situations. (AI)