Monetary Policy of Canada, January 2023

On January 25, the Bank of Canada (BoC) raised its target overnight rate from 4.25% to 4.50% and announced that it continues to reduce the amount of government bonds in circulation.

The rate hike was justified by excess demand and inflation, which is still more than double the upper end of the Bank’s target range of 1.0-3.0%. However, headline and core inflation declined significantly from their mid-year peaks. Together with the Bank’s belief that inflation would come down “significantly” in 2023, this bolstered the decision to raise rates by a smaller amount; in the previous two meetings, the Bank of Canada rose by 50 basis points.

In its press release, the Bank said it would keep rates at current levels going forward, but was prepared to raise them if necessary. This is in line with our experts who believe that rates will not change in the coming months until some mild monetary easing in late 2023.

The next BoC policy announcement will be on March 8th.

On the outlook, Randall Bartlett of Desjardins said:

“We expect the Bank of Canada to make no decisions for the foreseeable future. In fact […] we expect developments in the Canadian economy to be weaker than the Bank currently. This tells us that the next step for the Bank of Canada is likely to be a contraction as inflation falls throughout the year on the back of a recession that began in the first half of 2023.”