Bank of Canada has diverged from the Fed, and says rates not coming down soon

Bank of Canada has diverged from the Fed, and says rates not coming down soon, per Reuters.


The Bank of Canada, having raised rates in June and July to a 22-year high, has maintained a hold in its three subsequent policy-setting meetings. Inflation, which peaked at over 8% in 2022, slowed to 3.1% in October but has consistently exceeded the bank's 2% target since March 2021.

Governor Tiff Macklem, speaking in Toronto, emphasized the central bank's focus on domestic actions and mentioned that discussions about rate cuts have not commenced. The bank is still assessing the adequacy of the rate hikes and the appropriate duration for their maintenance.

Money markets anticipate a potential easing by April, with expectations of a 125-basis-point reduction in 2024. In contrast, U.S. Federal Reserve Chair Jerome Powell indicated that the era of historic monetary tightening might be concluding, with discussions about lowering borrowing costs becoming plausible.

While the Bank of Canada previously projected inflation to reach 2% by the end of 2025, Macklem indicated a revised outlook, aiming for proximity to the target by the close of the next year. Despite expressing optimism about bringing inflation down, he acknowledged upcoming challenges in the next few quarters due to the impact of elevated interest rates on the economy.

Macklem underscored the central bank's commitment to achieving the 2% inflation target and highlighted the gradual nature of anticipated future declines in inflation. Notably, the European Central Bank and the Bank of England have recently emphasized maintaining current policy stances without discussing policy easing.

Looking ahead, Macklem expects 2024 to be a transitional year, acknowledging the challenges of the cost of living rising rapidly and subdued economic growth. He anticipates difficulties in the next two to three quarters, with a potential increase in the jobless rate.

The Bank of Canada, during its December meeting, held the key overnight rate at 5%, leaving room for a potential future hike while expressing ongoing concerns about inflation amid economic deceleration and general price moderation. Analysts interpret Macklem's recent speech as indicating the central bank's comfort with the current tightness of policy rates to curb inflation.