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Bank of Canada hikes rates, becomes first major central bank to signal pause By Reuters


© Reuters. FILE PHOTO: A Canadian dollar coin, commonly known as the “Loonie”, is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch/File Photo


By Steve Scherer and David Ljunggren

OTTAWA (Reuters) -The Bank of Canada on Wednesday hiked its key interest rate to 4.5%, the highest level in 15 years, and became the first major central bank fighting global inflation to say it would likely hold off on further increases for now.

The 25-basis-point increase was in line with analysts’ expectations. The bank has raised rates at a record pace of 425 basis points in 10 months to tame inflation, which peaked at 8.1% and slowed to 6.3% in December, still more than three times the bank’s 2% target.

The members of the Governing Council “clearly have enough confidence that the tightening currently in place is already slowing the economy that they are comfortable they won’t need to lift rates further in most scenarios,” said Andrew Kelvin, chief Canada strategist at TD Securities.

In its quarterly Monetary Policy Report (MPR), which includes new forecasts, the bank painted a picture of an economy that is going to stall and could tip into a recession during the first half of the year, bringing inflation down to about 3% at mid-year and back to 2% in 2024.

“We are turning the corner on inflation,” Bank of Canada Governor Tiff Macklem told reporters. “We are still a long way from our target, but recent developments have reinforced our confidence that inflation is coming down.”

Macklem said the bank would pause its policy action to assess the cumulative effects of the current level of rates, adding repeatedly that the break was conditional on the economy evolving as is forecast.

Money markets see the Bank of Canada cutting rates already in October.

“It’s really far too early to be talking about cuts,” Macklem said. “The pause really is designed to give us time to assess whether we’ve raised interest rates enough to get inflation all the way back to target.”

The central bank had said in December that future rate decisions would be data dependent, and a blowout December employment report, released earlier this month, highlighted the upside risk to wage and price growth.

“The Bank of Canada is back to using forward guidance,” said Royce Mendes, director and head of macro strategy at Desjardins. “That likely ensures a pause in the rate-hiking cycle for at least the next few months.”

While food and shelter cost increases are still weighing on households and headline inflation is still high, the bank said in its MPR that “three-month CPI inflation has fallen to about 3.5%, suggesting a significant slowdown in inflation in coming months.”

The Canadian dollar was trading 0.3% lower at 1.3410 per greenback, or 74.57 U.S. cents. The 2-year yield eased nearly 6 basis points to 3.596%.

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