For Canada’s variable-rate mortgage holders, no information was excellent news as we speak.

As anticipated, the Financial institution of Canada delivered its first price pause in a yr following eight consecutive price hikes.

The Financial institution’s in a single day goal price stays at 4.50%, whereas prime price—the speed upon which variable charges and features of credit score are priced—stays at a 22-year excessive of 6.70%.

In its announcement, the Financial institution of Canada left the door open for additional price hikes ought to financial information warrant it.

“Governing Council will proceed to evaluate financial developments and the influence of previous rate of interest will increase, and is ready to extend the coverage price additional if wanted to return inflation to the two% goal,” it mentioned.

The Financial institution touched on the newest financial indicators, together with January’s headline CPI inflation studying 5.9% (down from a excessive of 8.1%), financial progress coming in flat in This autumn (largely on account of a slowdown in stock) and the latest “surprisingly robust” employment progress.

“General, the newest information stays consistent with the Financial institution’s expectation that CPI inflation will come all the way down to round 3% in the midst of this yr,” the Financial institution famous. “With weak financial progress for the subsequent couple of quarters, pressures in product and labour markets are anticipated to ease.”

Will the speed pause be sustained?

Whereas there was actually no uncertainty about as we speak’s price pause, the query on mortgage debtors’ minds now’s whether or not the Financial institution will stay on maintain, and the route of any future price transfer.

Most observers to date imagine the Financial institution can safely keep on the sidelines for now as the consequences of its 425-basis factors of price tightening proceed to work by the economic system.

“Progress and inflation information has come consistent with or under what the Financial institution had pencilled into their newest [Monetary Policy Report],” famous economists from Nationwide Financial institution of Canada. “We’d additionally word that references to ‘extra demand’ are gone, implying that price hikes are working as supposed.”

Despite the fact that the Financial institution’s assertion didn’t overtly state that it expects to carry the coverage price at its present degree, “no less than based mostly on the home financial outlook (relative to January’s MPR), we do imagine this pause could be sustained,” the Nationwide Financial institution economists argue. “As such, we will probably be on the lookout for one other ‘no change’ determination subsequent month, conditional on the continued cooperation in financial/inflation information that we count on to see.”

Potential recession nonetheless on the horizon

James Orlando at TD Economics commented that the Financial institution’s assertion exhibits it “isn’t in a rush to start out climbing once more.”

“Greater charges have additionally taken an enormous chew out of the curiosity rate-sensitive components of the economic system, with the true property market nonetheless within the means of discovering a backside,” he wrote in a word to purchasers.

Certainly, the query within the months forward will probably be how the nation’s “debt-saddled” economic system responds to the speed hikes delivered up to now, mentioned Marc Desormeaux, Principal Economist at Desjardins.

“We predict that this yr, the Canadian economic system will more and more really feel the complete influence of final yr’s rate of interest hikes,” he wrote in a analysis word.

“Lagged and vital price impacts anchor our name for a recession later in 2023,” Desormeaux added. “Evidently, the Financial institution additionally feels that there’s extra financial weak point to come back, and that can assist deliver worth pressures nearer to the two% goal. How strongly and the way rapidly that financial slowdown comes will decide whether or not the BoC continues to stay to its plan.”

Canada and U.S. charges: a diverging path ahead?

The Financial institution of Canada’s subsequent price determination will happen on April 12. However earlier than that, markets will probably be watching the upcoming Federal Reserve price determination south of the border on March 21.

Whereas the Financial institution of Canada stays on pause, the Fed has signalled it expects to proceed tightening, which might see the goal charges in Canada and the U.S. begin to diverge.

“Nothing concerning the [economic] information [to date] suggests to me that we’ve tightened an excessive amount of – certainly, it means that we nonetheless have work to do,” Fed Chair Jerome Powell mentioned this week.

BoC Deputy Governor Paul Beaudry commented in February on the potential for the Canadian and U.S. central banks to take diverging paths ahead within the months forward, saying, “we shouldn’t be too involved if Canada follows a barely totally different path to normalization than our counterparts.”

“Whereas BoC-Fed coverage divergence and associated foreign money implications have been hotly debated, we do assume the BoC is keen to tolerate a rising coverage differential and would settle for the weaker Canadian greenback,” Nationwide Financial institution economists wrote. “That mentioned, there’s most likely a line within the sand someplace—the important thing phrases in Beaudry’s feedback had been a ‘barely totally different path.’”

Featured picture: Renaud Philippe/Bloomberg through Getty Photographs