On January 24th, the Bank of Canada held the Key Rate at 5% for the fourth consecutive time. With the latest announcement, the BoC indicated that it sees that our economic growth has stalled and forecasts that, even with the uptick at the end of last year, growth will remain slow in the near term. That’s great news for inflation watchers as a cooling economy suggests that inflation should be trending back to the bank’s 2% target next year. 

Even better… economists point out that the BoC removed language that was in previous policy statements that said it, “remained prepared to hike again”. This seems to confirm that the BoC is confident that their restrictive monetary policy has been sufficient to achieve their objectives and that they’ve reached the end of interest rate increases. It hints that we could now look forward to interest rates heading lower in the coming months. Perhaps sooner rather than later.

Of course, a path to lower inflation, as explained by many economists, isn’t just a cooling economy and higher unemployment. As a component of CPI, mortgage interest costs were up 28.5% year-over-year. By removing mortgage costs from the calculation, the CPI over the second half of 2023 would have been in the 2% to 2.5% range. Right within the BoC’s target.

So, like a dog chasing its tail, part of the solution to lower inflation is actually a lower BoC Key Rate. Will the Bank of Canada use this strategy as part of the inflation solution? We’ll see in the coming months.