What Economists Are Saying About the BoC’s Rate Hold

The Bank of Canada’s extended rate pause was expected, but the big questions remain: where do rates go from here? And when? Leading economists weigh in.

By Josh Sherman | 3 minute read

Policymakers have provided some clues about where interest rates could be headed in Canada.

Overstretched mortgage borrowers may have had their fingers crossed for a rate cut ahead of the Bank of Canada’s policy announcement on March 5, but most market watchers had expected the central bank to stand firm — and that’s exactly what it did.

The BoC held its overnight rate, which influences mortgage rates — and is also policymakers’ main tool for tackling inflation — at 5%. That move may have been widely expected, but many observers were laser-focused on the statements the central bank released during the rate announcement. They were trying to read between the lines in search of clues as to where interest rates could be headed. Here are a few takeaways from the Wednesday announcement, according to Canadian economists. 

1. Inflation Is Still the Focal Point

“Inflation remains the key for policymakers who clearly aren’t comfortable yet,” writes Benjamin Reitzes, BMO’s managing director of Canadian rates, in his online commentary. Reitzes notes that the BoC’s statement refers to the fact that core inflation is hovering around 3% — a full percentage point above its target. “There’s still a fair amount of wood to chop on inflation,” he adds. An elevated overnight rate can help bring down inflation by reducing spending. It contributes to higher borrowing costs on things like mortgage payments and car loans, and therefore trims demand for goods and services (and consequently prices) over time.

2. Bank of Canada Expected to Stay on the Sidelines Through Spring

As for the timing of the bank’s next possible move, well, it could be around the corner. “The song remains the same. The BoC came out today to reinforce its view that more time is needed to make sure that inflation is headed to the 2% target. We get it,” writes James Orlando, a senior economist with TD Bank. How much time? Orlando — as well as BMO’s Reitzes and the vast majority of other market-watchers — anticipate the central bank’s first cut since April 2020 to arrive at the rate announcement scheduled for June 5 (that would mean the April 10 announcement would see the BoC continue to his pause). “While the BoC isn’t ready to adjust course just yet, we think that the time for rate cuts is quickly approaching.”

3. A Hot Spring Housing Market Could Keep Rates Higher for Longer 

Of course, when the BoC chooses to act depends on a variety of factors. In a response to the BoC announcement, Derek Holt, Scotiabank vice president, draws attention to how Tiff Macklem, the central bank’s governor, responded to questions from the media about how the upcoming spring housing market could factor into the BoC’s decision-making process. “We expect some rebound in housing in our projection. Could that rebound be stronger than we expected? Yes it could. That is an upside risk,” Macklem is quoted as saying. In other words, a hot housing market could reignite higher inflation and cause the bank to hold rates at 5% for longer — or even hike them. While it’s too early to tell the fate of the spring housing market, typically the busiest time of year for real estate activity, there are early signs of some frothiness. For example, according to Wahi data, 25% of Greater Toronto Area neighbourhoods returned to overbidding territory in February, a trend to follow closely in the coming months.