# Bank of Canada seen on hold even as economy accelerates
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2023-04-10
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: Bank of Canada Expected to Maintain Interest Rates Amid
Meta Description: Stay updated on Bank of Canada's decision to leave interest rates unchanged despite surprising economic growth. Find out more here.
URL: https://financedigest.com/bank-of-canada-seen-on-hold-even-as-economy-accelerateshtml

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By Fergal Smith

TORONTO (Reuters) -The Bank of Canada is expected to take in stride surprising recent economic strength and leave interest rates unchanged at its meeting on Wednesday, pinning its hopes on activity cooling as higher borrowing costs sink in, analysts said.

Last month, the Bank of Canada became the first major global central bank to pause its rate-hiking campaign, after lifting its benchmark rate to a 15-year high of 4.50%. It said no further tightening would be needed if the [economy slows](https://www.financedigest.com/visa-revenue-growth-slows-more-as-tough-economy-sobers-spending.html "Visa revenue growth slows more as tough economy sobers spending"), or even moves into a slight recession, as it expects.

While inflation has cooled in recent months, other economic indicators are pointing to an economy that is picking up pace from a sluggish [fourth quarter](https://www.financedigest.com/german-gdp-contracted-by-0-4-in-the-fourth-quarter.html "German GDP contracted by 0.4% in the fourth quarter").

Preliminary [data last week](https://www.financedigest.com/wall-st-seen-steady-ahead-of-inflation-data-fed-later-in-week.html "Wall St seen steady ahead of inflation data, Fed later in week") showed that gross domestic product (GDP) rose by 0.3% month-over-month in February, building on a stronger-than-expected 0.5% gain in January. Employment [data for March showed a seventh consecutive job](https://www.financedigest.com/stocks-sag-as-hawkish-fed-cools-china-rally-awaits-us-jobs-data.html "Stocks sag as hawkish Fed cools China rally; awaits US jobs data") gain.

The economy is showing renewed momentum, with more people working and seeing their [incomes rise,”](https://www.financedigest.com/stanchart-surprises-with-40-profit-jump-ups-income-goal-on-rising-rates.html "StanChart surprises with 40% profit jump, ups income goal on rising rates") said James Orlando, a senior economist at TD Economics. “They are out spending again. This will carry through to higher [economic growth.”](https://www.financedigest.com/german-economic-growth-to-remain-muted-in-near-term-imf.html "German economic growth to remain muted in near term – IMF")

That is welcome news for most, but not for Bank of Canada (BoC) Governor Tiff Macklem, as it could call into question his decision to announce a conditional [rate pause](https://www.financedigest.com/central-banks-hike-rates-again-but-a-pause-is-coming.html "Central banks hike rates again, but a pause is coming") in January.

Macklem is seeking to rebuild public trust after facing criticism for acting too slowly to tame inflation, which spiked after [pandemic restrictions](https://www.financedigest.com/pandemic-restrictions-that-hampered-the-circulation-of-viruses-other-than-covid-19.html "Pandemic restrictions that hampered the circulation of viruses other than COVID-19") were lifted. The [central bank](https://www.financedigest.com/stock-pickers-reckon-its-time-to-move-on-from-central-banks.html "Stock pickers reckon it’s time to move on from central banks") has admitted to having initially misjudged the price pressures.

That effort could be complicated by Prime Minister Justin Trudeau’s recent budget, which has outlined [billions of dollars in new spending](https://www.financedigest.com/europes-spend-on-energy-crisis-nears-800-billion-euros.html "Europe’s spend on energy crisis nears 800 billion euros").

CONCERNED BUT HOPEFUL

February’s surprisingly strong figures have led economists to revise up their GDP estimates, with the median forecast of six economists [surveyed by Reuters pegging first-quarter growth](https://www.financedigest.com/uk-recruiters-slow-pace-of-pay-growth-in-march-rec-survey-shows.html "UK recruiters slow pace of pay growth in March, REC survey shows") at 2.5%, far higher than the BoC’s projection of 0.5%.

“For the BoC, we still expect a hold,” Orlando said. They will likely be [concerned about the rebound in economic](https://www.financedigest.com/oil-falls-on-concerns-economic-slowdown-may-dent-fuel-demand.html "Oil falls on concerns economic slowdown may dent fuel demand") activity, but we think they are still hopeful of a deceleration over the remainder of 2023.

All 33 economists polled by Reuters agree that the BoC will hold its key overnight rate steady on Wednesday when it makes its [next policy](https://www.financedigest.com/yen-trims-gains-as-possible-next-boj-governor-says-current-policy-appropriate.html "Yen trims gains as possible next BOJ governor says current policy appropriate") announcement. [Money markets are betting that the central bank’s](https://www.financedigest.com/marketmind-banks-are-leaking-money.html "Marketmind: Banks are leaking money") next move will be a cut.

Investors [reason that the full impact of higher](https://www.financedigest.com/five-reasons-to-start-saving-early-for-higher-education.html "Five Reasons to Start Saving Early for Higher Education") borrowing costs has yet to be felt, and recent stress in the global banking system has fueled concern of a credit crunch, including in the United States. Canada sends 75% of its exports to its southern neighbor.

We [see growth](https://www.financedigest.com/wto-sees-subpar-2023-trade-growth-with-multiple-risks.html "WTO sees “subpar” 2023 trade growth with multiple risks") being driven largely by an easing of prior supply constraints … rather than a significant strengthening in [domestic demand,”](https://www.financedigest.com/turkeys-economy-grew-7-6-in-q2-driven-by-domestic-demand-exports.html "Turkey’s economy grew 7.6% in Q2 driven by domestic demand, exports") said Andrew Grantham, a senior economist at CIBC Capital Markets.

We suspect that the Bank of [Canada will view the apparent strength](https://www.financedigest.com/royal-mail-adds-canada-freight-strength-with-287-million-rosneau-deal.html "Royal Mail adds Canada freight strength with 7 million Rosneau deal") in Q1 GDP similarly, and increase its estimate of potential growth.

Potential growth is the rate at which activity in the economy can increase without causing inflation, so a [rise in the estimated level could reduce the need for a hawkish shift from the central bank](https://www.financedigest.com/the-rise-of-biometric-technology-in-banking.html "The rise of biometric technology in banking").

Economists say that rapid population growth as well as easing [supply chain](https://www.financedigest.com/g7-finance-leaders-pledge-financial-stability-supply-chain-diversity.html "G7 finance leaders pledge financial stability, supply chain diversity") disruptions could add to Canada’s potential growth, which was last estimated by the BoC to be 2.25% on average over 2023 and 2024.

Canada’s economy faces headwinds from higher borrowing [costs and financial](https://www.financedigest.com/how-much-does-cloud-based-financial-software-cost.html "How Much Does Cloud-based Financial Software Cost?") stability concerns, while inflation has cooled more than in the United States, said Nathan Janzen, assistant chief economist at Royal Bank of Canada.

“So still good reasons on both sides for the BoC to stick with a wait-and-see approach for now,” Janzen said.

(Reporting by Fergal Smith; Editing by Steve Scherer and Andrea Ricci)


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