The Bank of Canada hit pause on Wednesday for the first time in a year, opting to hold its benchmark interest rate at 4.5 per cent as it assesses the impact of its aggressive tightening cycle.
The highly anticipated move makes the Bank of Canada the first major central bank to pause interest rate hikes. It also follows through on the bank’s previous signal that it was ready to pause its current tightening cycle, one that included eight consecutive rate hikes in an effort to tame soaring inflation.
"Overall, the latest data remains in line with the Bank’s expectation that CPI inflation will come down to around 3 per cent in the middle of this year," the Bank of Canada said in a statement released alongside the rate decision.
"Governing Council will continue to assess economic developments and the impact of past interest rate increases, and is prepared to increase the policy rate further if needed to return inflation to the 2 per cent target."
Wednesday’s decision was expected by economists and markets, according to Bloomberg.
While the most recent Labour Force Survey showed the Canadian job market remains strong, GDP growth has stalled and inflation has decelerated from its June 2022 highs, falling to 5.9 per cent in January. The Bank noted that "the labour market remains very tight", but also said pressures in product and labour markets should ease amid weak economic growth for the next couple quarters.
"This should moderate wage growth and also increase competitive pressures, making it more difficult for businesses to pass on higher costs to consumers," the central bank said.
Bank of Canada Governor Tiff Macklem said at a press conference in January that pausing rate hikes was “conditional on economic developments coming out in line with our forecasts.” The central bank reiterated that pledge to pause on Wednesday, saying it was conditional on economic developments evolving in line with its outlook.
"Clearly, the Bank wants to keep its options open if inflation doesn't go their way and/or if the job market continues to sizzle," BMO Capital Markets chief economist Douglas Porter wrote in a research note on Wednesday.
"The (Bank of Canada) will now be data dependent, and if the recent strong momentum persists, look for the tone to toughen in the coming weeks."
CIBC Economics managing director Avery Shenfeld said in a research note released on Wednesday that "the Bank of Canada needs a clearer picture on growth and inflation prospects to decide if it needs to hike again or more definitively set aside that prospect."
"With so little time since it initiated its conditional pause, it simply doesn't have enough data to provide that clarity," Shenfeld wrote.
On Tuesday, traders were pricing in 80 per cent change of another quarter percentage point hike at some point in 2023. That's due in part to a rebound in economic activity and a resurgence in inflationary pressures elsewhere, including the United States.
The pause by the Bank of Canada puts it on a diverging path from its U.S. counterpart. U.S. Federal Reserve chairman Jerome Powell told lawmakers this week that rates will likely have to go higher than previously anticipated.
"The Bank of Canada’s conditional commitment to keep rates on hold will place a magnifying glass on the divergence in monetary policy with the U.S. Federal Reserve," Desjardins managing director and head of macro strategy Royce Mendes wrote in a research note on Wednesday.
Still, he added that "given the sharp repricing in expectations over the past few weeks, the relatively neutral language in the statement is seeing markets marginally reduce bets for further rate increases."
With files from Bloomberg.
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.