‘Monetary policy is working’: Bank of Canada continues to hold interest rate at 5%

For the sixth time in a row, Canada’s central bank will keep its key interest rate at five percent.

Tiff Macklem, Bank of Canada governor, shared the update early Wednesday and said there are three main takeaways from this month’s announcement.

The first, he says, is that monetary policy is working.

READ MORE: Bank of Canada maintains interest rate of 5%

“Total consumer price index (CPI) and core inflation have eased further in recent months, and we expect inflation to continue to move closer to our 2 per cent target, this year.”

He said that economic growth is picking up, adding that he expects GDP growth to be “solid this year and to strengthen further in 2025.”

“And third, as we consider how much longer to hold the policy rate at the current level, were looking for evidence that the recent further easing in under lying inflation will be sustained.”

Oil prices driving CPI increases

According to April’s monetary policy report, high gas prices continue to bolster CPI inflation, and the bank expects that trend to continue into the second quarter of 2024.

Two noteworthy takeaways from Wednesday’s report are its analyses of the driving factors behind the above-expected global oil prices.

The first driver of the global increase in oil prices stems from the Organization of the Petroleum Exporting Countries decision to continue its voluntary cuts to oil product.

The second contributing factor behind the unexpectedly high price is international conflict around the globe.

The bank points to Russia’s war on Ukraine as one aspect of the increase and the necessary rerouting of oil away from the Red Sea as putting a “persistent risk premium” on oil prices.

‘Housing prices could rise sharply’

Another trend the bank says it needs to keep an eye on is the demand for housing.

It says that it saw a moderate increase in housing prices that was unexpected in January and that “house prices could rise faster than forecast if easing financial conditions or population growth leads to stronger-than-expected demand for housing while supply remains constrained.”

While housing growth is expected to rise as a result of recent government policy announcements, the numbers in Wednesday’s report show that the demand for housing continues to sharply outpace recorded housing starts across the country.

READ MORE: Ontario proposes counting retirement homes, student housing towards housing targets

Earlier this year, Ontario’s Finance Minister Peter Bethlenfalvy acknowledged the shortcomings in housing starts in his province and said high-interest rates were stifling construction.

“That too shall pass, and what we won’t waver on is our commitment to find more ways to get more houses,” he said.

Bank signals cuts could come, remains cautious

Ultimately, the bank concluded that it is seeing downward trends within the CPI index and future cuts to Canada’s interest rates could be coming, current interest remains high and it is too soon to do so.

“In the month’s ahead, we will be closely watching the evolution of core inflation, and we will remain focused on the balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behavior as indicators of where inflation is headed,” Macklem closed out Wednesday’s announcement.

The last time Canada’s interest rate was below 5 per cent was in June of 2023, when it was 4.75 per cent.

“We’ve come a long way in the fight against inflation, and recent progress is encouraging. We want to see this progress sustained.”

The next scheduled overnight rate announcement will come on June 5, 2024 and the next MPR report will be released on July 24.