NO Rate Hikes - Bank of Canada

This is the first time that the Bank of Canada decided to not hike the interest rate. That is a pretty significant policy change. But, it was very well expected and the pause was already factored in by the market.

Ninety nine percent of the analysts predicted that there will be no hike this month. The Bank was taking its time to analyze the impact of the quantitative tightening policy they have been implementing since March 2022. Oh gosh, it has been a year of continuous rate hikes.

How did I react?

The news is encouraging for borrowers like me. I almost panicked when the rates increased from 0.25% in March last year to 4.5% in February 2023. Like many around the world, it was not easy to manage my budget with the continuous hike. I jumped into owning a home two years ago and the rate hikes humbled me too well. Now, I feel like I am well aware of the policy rate consequences and the economic and financial decisions the central bank takes irrespective of the situation customers are in.

Having said that, I also know that the situation is not improving for me yet.

During the press release, the Bank of Canada was pretty clear that they are ready to hike the interest rate if the data suggests there is a need for higher rates.

Bank of Canada - "Governing Council will continue to assess economic developments and the impact of past interest rate increases, and is prepared to increase the policy rate further if needed to return inflation to the 2% target."

There were few data points the bank highlighted in their press release.

Economic Data

BoC noted that the economic data was cooler in the last quarter than expected. Thanks to higher interest rates, household spending and business investment are slowing. That’s bad but that is good for the potential rate hikes going forward.

The Unemployment Rate -

The unemployment rate remains at the boundary. The job growth is still going strong whereas the Bank wanted it to slow down in response to the rate hikes. I do not think this is a good indicator as this indicator does not categorize the type of jobs and the rates. But, that’s the central bank and I cannot argue with their indicator.

Inflation-

The most important for all - is the inflation data. The inflation data for January 2023 came out at 5.9%. This is the first time the inflation rate went below 6% which is still higher than the target rate of 2%. The future course of action depends a lot on this specific number. This is the highlight data for many people out there.

So, the BOC decided to pause the hike based on these three sets of indicators. Will they continue to hold their rate hike decision?

It all depends on what happens south of the border in the United States of America (USA).

The Federal Bank in the US is not pausing the rate hikes. The market is plunging today and this announcement is one of the many reasons. If the US continues to hike rates then the Bank of Canada could end up in a situation where they need to manage the CAD value against USD. The lower the CAD value against the USD, the bank may need to make decisions to curb inflation caused by the gap.

I am not sure how the BoC will manage this choppy water going forward. They are not in a comfortable position going against US policy. But, I also feel that maybe the US rate hikes will not be as high as everyone is predicting it to be.

Let’s see how this unfolds in the next few months.

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