Bank of Canada signals possible cuts as key interest rate held at 5%

The Bank of Canada held its key interest rate at five per cent this week, and is now looking ahead to potential rate reductions.

While Wednesday marked the fourth time in a row that the bank has left the key rate unchanged, Tiff Macklem, the central bank’s governor, said the bank’s outlook is shifting.

“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,” Macklem said on Wednesday.

But while cuts may be on the horizon, Macklem left the door open for increases as well, in the event 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.”

Canada’s annual inflation rate rose to 3.4 per cent last month. Grocery prices also remained high in December, sitting 4.7 per cent higher than December of 2022.

The Bank of Canada’s latest forecasts, released this week, suggest the economy will remain weak before an expected rebound in the second half of the year.

Inflation, meanwhile, is expected to return to two per cent by 2025.

–with files from The Canadian Press