Bank of Canada holds key interest rate steady, analyst says USD/CAD could head to 1.40

 

Proactive Investors - The Bank of Canada has kept its key interest rate steady for the first time in a year, holding at 4.5%, while stating that it is continuing with its policy of quantitative tightening.

It was signalled at its January decision that the bank expected to hold the interest rate at its current level, conditional on economic developments.

The bank also reiterated its commitment to returning inflation to its 2% target and said it is prepared to increase the policy rate further if needed.

“The bank remains resolute in its commitment to restoring price stability for Canadians,” it said in a statement.

With annual inflation easing to 5.9% in January, the bank said it expects inflation to come down to about 3% year-over-year by the middle of 2023.

Analysts at ING noted that the contrast between the Bank of Canada and the renewed hawkishness at the Federal Reserve is increasingly stark.

"Today, BoC confirmed that rates most likely peaked in January with 'restrictive monetary policy' weighing on household spending and investment," they noted.

"While BoC acknowledges that the labour market 'remains very tight', it doesn't have the same fears as the Federal Reserve that this will keep inflation pressures elevated."

The analysts added that, although the Bank of Canada said it may increase the policy rate further if needed to return inflation to its 2% target, they do not think it will need to.

Following the Bank of Canada’s announcement, the USD/CAD hit its highest level since November 2022, reaching 1.3784 at noon.

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