Bank of Canada to hold rates steady in 2023, budget watchdog says

By Ismail Shakil

OTTAWA (Reuters) - The Bank of Canada will hold its key policy rate at the current level of 4.5% until the end of this year and will start cutting rates in January 2024, Canada's independent budgetary watchdog forecast on Thursday.

The central bank has raised rates at a record pace over the past year to tame inflation that hit a four-decade high of 8.1% in June.

After its last hike in January, the Bank of Canada became the first major central bank fighting global inflation to say it would likely "pause" further moves as long as prices continue to come down as it has forecast.

"We expect the Bank of Canada to maintain its 'pause' through to the end of this year," Parliamentary Budget Officer (PBO) Yves Giroux said in a report. "With CPI inflation on track to return to its 2% target, we then expect the Bank to start lowering its policy rate early next year."

Canada's budgetary watchdog said it expects interest rates to fall to 2.5% by December 2024.

While money markets still expect that the central bank will keep its benchmark rate unchanged at next week's policy announcement, they are pricing in additional tightening later in the year.

Canada's economy will stagnate this year as tighter monetary policy takes hold, the PBO projected.

"Following a stronger-than-expected performance in the second half of last year, we project the Canadian economy to effectively stagnate over the course of this year," Giroux said.

Economic data have been mixed since the central bank signaled the pause, with a blowout jobs report in January showing continued labor market tightness, while inflation and GDP data have been more muted.

(Reporting by Ismail Shakil in Ottawa; Additional reporting by Fergal Smith; Editing by Mark Porter)