Bank of Canada holds key interest rate at 5%, signals shift toward rate cut talks

The Bank of Canada held its key interest rate at five per cent Wednesday and signalled it has begun discussing when it should start cutting rates.

“With overall demand in the economy no longer running ahead of supply, governing council’s discussion of monetary policy is shifting from whether our policy rate is restrictive enough to restore price stability, to how long it needs to stay at the current level,” governor Tiff Macklem said in prepared remarks.

The Bank of Canada’s decision to hold its key rate comes as no surprise. Weaker economic growth along with slowing inflation has allowed the central bank to hold its policy rate steady and monitor how the economy is responding to higher rates.

However, economists have been eagerly waiting for any sign from the bank on when it may pivot to rate cuts.

Despite the shift in messaging, Macklem maintained that the central bank is still open to more rate hikes if inflation doesn’t co-operate.

“That doesn’t mean we have ruled out further policy rate increases. If new developments push inflation higher, we may still need to raise rates,” Macklem said.

“But what it does mean is that if the economy evolves broadly in line with the projection we published today, I expect future discussions will be about how long we maintain the policy rate at five per cent.”

The Bank of Canada’s press release on the rate decision also noted that the governing council is still concerned about the stubbornness of elevated inflation.

Canada’s annual inflation rate ticked back up in December to 3.4 per cent as underlying price pressures remained high.

Ahead of Wednesday’s decision, forecasters were widely expecting weakness in the Canadian economy would prompt the central bank to begin cutting interest as early as this spring.

The Bank of Canada’s latest forecasts released today suggest the economy will continue to be weak before rebounding in the second half of the year, while inflation is still expected to return to two per cent in 2025.

Its forecasts are mostly unchanged from October.