The Bank of Canada is expected to keep interest rates on hold despite growth in the first quarter. This comes amid cooling inflation and financial turmoil, as the global banking system experiences stress. The Bank of Canada was the first major central bank to pause its tightening campaign last month, leaving its benchmark rate at 4.50%. Governor Tiff Macklem said he wanted to let the previous eight rate hikes sink in and would hold off on further increases as long as inflation came down as forecast. Although inflation has been edging down, growth at the start of the year has vastly outpaced the bank's expectations. However, the bank's concerns over widespread credit crunch in the global banking sector have left central bankers on guard.
All 33 economists polled by Reuters agree that the Bank of Canada (BoC) will hold its key overnight rate steady. Money markets are betting that the central bank's next move will be a cut. The BoC will release its monetary policy report with new forecasts on Wednesday. In January, the bank forecast 0.5% annualized growth in the first quarter, but most analysts now expect it to be about 2.5% after flatlining in the fourth quarter of last year. Hedge fund bets against Canada's TD Bank Group last week hit $4.2 billion, making it the most-shorted banking stock globally.
Canada's rapid population growth could lead to the BoC raising its estimate of the neutral interest rate. The neutral rate is the level at which monetary policy is neither stimulating nor slowing the economy. Analysts suggest that increasing the estimate could indicate that the central bank expects rates to eventually settle at a higher level than previously thought. Deputy Governor Toni Gravelle said last month that the BoC was "ready to act in the event of severe market-wide stress" in the financial system. However, he added that currently Canada is nowhere near that point.
While growth has exceeded expectations, the Bank of Canada is expected to keep interest rates on hold due to cooling inflation and financial turmoil in the global banking system. Money markets are betting on the central bank's next move being a cut. The bank's concerns over widespread credit crunch in the global banking sector have left central bankers on guard, and hedge fund bets against Canadian banks have increased. Although Canada's rapid population growth could lead to an increase in the estimate of the neutral interest rate, the Bank of Canada has made it clear that they will act in the event of severe market-wide stress in the financial system.
