Bank of Canada holds the line on interest rates but says ‘it’s not job done’

The Bank of Canada is leaving interest rates put for now, but left the door open to another rate hike if inflation doesn't come down fast enough.

In an announcement Wednesday morning, the bank said it is keeping its key overnight rate at 4.5 per cent.

The bank expects CPI inflation to fall quickly to around three per cent in the middle of this year and then decline more gradually to the two per cent target by the end of 2024," the bank said in a news release.

In a speech after the announcement, Bank of Canada governor Tiff Macklem left the door open to a rate hike.

If monetary policy is not restrictive enough to get us all the way back to the two per cent target, we are prepared to raise the policy rate further to get there," Macklem said.

In February, the annual rate of inflation fell to 5.2 per cent, according to Statistics Canada.

While that's substantially lower than the 8.1 per cent it peaked at last June, it's still above the bank's target of two per cent.

This is good news, but it's not job done," Macklem said.

Despite the forecast, getting inflation to two per cent from 5.2 per cent might be harder than getting it to 5.2 per cent from 8.1 per cent, the bank suggested.

Getting inflation the rest of the way back to two per cent could prove to be more difficult because inflation expectations are coming down slowly, service price inflation and wage growth remain elevated, and corporate pricing behaviour has yet to normalize," the bank said.

Last March, the bank began an aggressive rate-hike campaign in a bid to drive inflation down, pushing the overnight rate to 4.5 per cent from 0.25 per cent.

The theory is that by making it more expensive to borrow money, consumers - and businesses - will spend less, which will drive prices down.

In January, a hike of 25 basis points (a quarter of a percentage point) came with a statement from Macklem that it was pausing hikes - at least temporarily.

While the effects of the earlier series of rate hikes are still working their way through the economy, the bank also said it's concerned Canada's economy is growing too quickly, something that could push inflation higher.

Demand is still exceeding supply and the labour market remains tight. Economic growth in the first quarter looks to be stronger than was projected in January," the bank said.

Still, the bank also noted that stress in the U.S. financial sector following the collapse of Silicon Valley Bank could hurt the American economy, hitting demand for Canadian exports.

The bank was trying to show both sides of the economic coin, said BMO chief economist Douglas Porter.

There was something here for the hawks, and something here for the doves," said Porter.

The bank's statement was a little bit more hawkish than markets were expecting, however, said Porter, noting that the likelihood of a rate cut by the end of the year had dropped slightly. In trading on the overnight swaps" market, the odds of a rate cut by the end of the year - which had been as high as 97 per cent earlier this week - fell to roughly 76 per cent after the bank's announcement.

The bank also unveiled its latest Monetary Policy Report, a detailed look at national and global economic trends.

Later this morning, Bank of Canada governor Tiff Macklem will hold a news conference to discuss the report.