The Bank of Canada won't be lowering its key lending rate this year despite financial markets already pricing in multiple cuts starting this fall, according to a senior economist at Vanguard.
"Their credibility is at stake," Roger Aliaga-Diaz, senior economist and head of global portfolio construction at Vanguard, tells Yahoo Finance Canada in an interview.
"[The Bank of Canada's] fear is if they give in to what the market is asking or expecting, and then inflation goes back up, now they don't have the credibility to control it."
When inflation started to run above the central bank's two per cent target in the spring of 2021, officials assured Canadians it would be short-lived. Now, nearly two years later, inflation is only beginning to show signs of easing after the Bank's most aggressive tightening cycle in its history.
That was a big blow to its credibility, Aliaga-Diaz says, adding that the Bank would rather push against market expectations for rate cuts until it's absolutely sure inflation has been tamped down to preserve what little credibility it has left.
On Wednesday, the Bank lifted its benchmark rate by a quarter point to 4.5 per cent and said it's looking to hold off on further hikes for the time being to assess the impact of higher rates on the economy. It's widely thought that interest rate moves take 12-18 months to fully filter through the economy.
"To be clear, this is a conditional pause," Bank of Canada governor Tiff Macklem said in a press conference on Wednesday. "It is conditional on economic developments coming out in line with our forecast."
Macklem reiterated a number of times during the press conference that "it's way too early to be talking about cuts." Regardless, data show financial markets are already pricing in five rate cuts between October and April.
However, the risks are "asymmetrical" for the Bank of Canada, Aliaga-Diaz says.
On one hand, higher rates could lead to a recession, which most economists believe will be moderate. On the other, lowering its benchmark rate could risk inflation moving further away from the central bank's target for a second time, he adds.
He sees the Bank holding on rates at least through the end of the year.
"It will take commitment from the central bank to hold on rates so that's where, maybe, the market will be a little bit disappointed," Aliaga-Diaz said.
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.