Tiff Macklem comments on policy outlook after BoC leaves key rate unchanged at 5%
|Tiff Macklem, Governor of the Bank of Canada (BoC), explains the BoC decision to leave the interest rate unchanged at 5% after the January policy meeting and responds to questions from the press.
BoC press conference key quotes
"BoC is now starting to look at how long rates need to stay at current levels rather than whether policy rate is restrictive enough."
"This doesn't mean we have ruled out further policy rate increases; if new developments push inflation higher, we may still need to raise rates."
"We need to give higher rates time to do their work."
"If economy evolves broadly in line with our latest projections, expect future discussions will be about how long we maintain rate at 5%."
"Push and pull on inflation means further declines are likely to be gradual and uneven, path back to 2% target will be slow and risks remain."
"There was clear consensus at Governing Council to maintain policy rate at 5%."
"Global growth has slowed but not as much as we thought it would."
"We need to see more progress before we discuss a possible rate cut."
"As regards the future of quantitative tightening, we'll take it one decision at a time."
"Certainly not there yet when it comes to ending QT."
"We're not forecasting a deep recession, we don't think we need one to get inflation back to target."
This section below was published at 14:45 GMT to cover the Bank of Canada policy announcements and the market reaction.
The Bank of Canada (BoC) left its key rate unchanged at 5% following the January policy meeting as expected.
In its policy statement, the BoC noted that it is still concerned about risks to outlook for inflation, particularly the persistence in underlying inflation.
BoC policy statement key takeaways
"With weak growth, supply has caught up with demand, and the Canadian economy looks to be operating in modest excess supply."
"Canadian growth is likely to remain close to zero through Q1-2024, will gradually strengthen around middle of 2024."
"Inflation expected to remain close to 3% in first half of 2024, returning to 2% target in 2025."
"Want to see further and sustained easing in core inflation, will focus on balance between demand and supply, inflation expectations, wage growth and corporate pricing behavior."
"Shelter price inflation is high and is expected to put upward pressure on inflation for some time."
"Shelter services price inflation expected to decline modestly over next few years and act as a significant headwind against return of inflation to target."
"If wages continue to grow in 4-5% range and productivity growth remains weak, inflationary pressures could increase."
"Concerned that upside risks could materialize and cause inflation to remain above target for longer than expected."
"2023 growth forecast revised down to 1.0% (vs 1.2% in October), 0.8% in 2024 (vs 0.9%), 2.4% in 2025 (vs 2.5%)."
"Q4 2023 output gap is estimated to be between -0.25% and -1.25%; potential output is expected to increase by about 2% on average over 2023 to 2025."
"Annualized Q3 GDP seen at -1.1% (vs +0.8% in October), Q4 0.0% (vs 0.8%), Q1 2024 0.5%."
"Inflation to average 3.9% in 2023 (unchanged vs October), 2.8% in 2024 (vs 3.0%), 2.2% in 2025 (unchanged)."
"Considerable economic uncertainty remains; overall, risks to outlook appear balanced."
"Inflation remains too high, with persistent strength in shelter and food price inflation."
Market reaction to BoC policy decisions
USD/CAD edged higher with the immediate reaction to the BoC policy announcements and the pair was last seen trading flat on the day at 1.3460.
Canadian Dollar price today
The table below shows the percentage change of Canadian Dollar (CAD) against listed major currencies today. Canadian Dollar was the weakest against the Swiss Franc.
| USD | EUR | GBP | CAD | AUD | JPY | NZD | CHF | |
| USD | -0.55% | -0.48% | -0.04% | -0.35% | -0.76% | -0.57% | -0.83% | |
| EUR | 0.54% | 0.05% | 0.44% | 0.17% | -0.27% | -0.04% | -0.32% | |
| GBP | 0.47% | -0.06% | 0.39% | 0.12% | -0.33% | -0.07% | -0.37% | |
| CAD | 0.01% | -0.49% | -0.46% | -0.36% | -0.74% | -0.56% | -0.82% | |
| AUD | 0.29% | -0.24% | -0.18% | 0.24% | -0.42% | -0.30% | -0.55% | |
| JPY | 0.76% | 0.21% | 0.28% | 0.70% | 0.39% | 0.14% | -0.04% | |
| NZD | 0.58% | 0.02% | 0.09% | 0.52% | 0.21% | -0.16% | -0.27% | |
| CHF | 0.83% | 0.32% | 0.36% | 0.76% | 0.53% | 0.04% | 0.30% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).
This section below was published as a preview of the Bank of Canada rate decision at 09:00 GMT.
- Canadian central bank is widely expected to keep its interest rate at 5.0%.
- Bank of Canada officials could emphasize the stickiness of inflation.
- Canadian Dollar has been on the defensive so far this year.
- Investors’ attention should also remain on the BoC Monetary Policy Report.
It is widely anticipated that the Bank of Canada (BoC) will maintain its policy rate at 5.0% for the fourth consecutive time at its event on Wednesday, January 24. The Canadian Dollar (CAD) has been depreciating markedly since the beginning of the new year against its southern neighbour, the US Dollar (USD). So far this week, USD/CAD managed to regain some ground lost in the latter half of the last week, revisiting the 1.3480 zone, where the critical 200-day SMA also sits.
It will be the first meeting of the year and those who expect the central bank to drop its guard could be greatly disappointed, particularly since the release of Canada's inflation figures in December, which saw consumer prices unexpectedly rise 3.4% over the last twelve months and the BoC’s Trimmed-CPI and Median-CPI maintain its firm stance.
Bank of Canada interest rate expectations: Rate hikes still on the table?
While the central bank could revise lower its GDP forecasts, it should certainly keep its cautious stance well in place, therefore the likelihood of further rate hikes are expected to remain an option in case the disinflationary pressures continue to show signs of exhaustion.
According to BoC Governor Tiff Macklem, in the latest recap of discussions, the Governing Council emphasized the significance of restating their readiness to increase the rate if necessary. He added that fortunately, longer-term inflation expectations have remained securely anchored, although short-term expectations have escalated in tandem with inflation. Macklem also mentioned that by the conclusion of 2024, the bank should be approaching the 2% inflation target.
When will the BoC release its monetary policy decision and how could it affect USD/CAD?
The Bank of Canada is set to disclose its policy decision at 15:00 GMT on January 24, followed by the publication of the bank’s Monetary Policy Report (MPR).
The anticipated impact on the Canadian currency is expected to be limited if any at all. A hawkish hold could prompt a near-term knee-jerk drop in USD/CAD, although its duration and extension are unlikely to be convincing. Of note is that much of the so-far yearly uptrend in spot is attributed to the dynamics of the USD. The pair, in the meantime, continues to navigate around the 200-day SMA near 1.3480, and a sustained breakout of this zone should lend fresh wings to the pair and refocus its target to the December peaks around 1.3620.
On the flip side, there seems to be no strong catalysts in the very near term to allow for the Canadian Dollar to embark on a sustainable appreciation, which could eventually drag the pair to its initial contention zone at the December lows near 1.3180.
Bank of Canada FAQs
What is the Bank of Canada and how does it influence the Canadian Dollar?
The Bank of Canada (BoC), based in Ottawa, is the institution that sets interest rates and manages monetary policy for Canada. It does so at eight scheduled meetings a year and ad hoc emergency meetings that are held as required. The BoC primary mandate is to maintain price stability, which means keeping inflation at between 1-3%. Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Canadian Dollar (CAD) and vice versa. Other tools used include quantitative easing and tightening.
What is Quantitative Easing (QE) and how does it affect the Canadian Dollar?
In extreme situations, the Bank of Canada can enact a policy tool called Quantitative Easing. QE is the process by which the BoC prints Canadian Dollars for the purpose of buying assets – usually government or corporate bonds – from financial institutions. QE usually results in a weaker CAD. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The Bank of Canada used the measure during the Great Financial Crisis of 2009-11 when credit froze after banks lost faith in each other’s ability to repay debts.
What is Quantitative tightening (QT) and how does it affect the Canadian Dollar?
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Bank of Canada purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the BoC stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Canadian Dollar.
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