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Bank of Canada presses the pause button, gold priced in CAD ticks up

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(Kitco News) The Bank of Canada paused its tightening cycle Wednesday, keeping its key overnight rate unchanged at 4.5%. Markets largely expected the hold in rates, and gold priced in Canadian dollars continued to edge up after some early-morning losses.

Justifying its decision, Canada's central bank said that economic developments are evolving broadly in line with its outlook.

"In Canada, economic growth came in flat in the fourth quarter of 2022, lower than the Bank projected," the Bank said in the statement. "Restrictive monetary policy continues to weigh on household spending, and business investment has weakened alongside slowing domestic and foreign demand."

Even though the labor market remains tight and wages are continuing to grow, inflation is easing, reflecting lower price increases for energy, durable goods and some services.

"With weak economic growth for the next couple of quarters, pressures in product and labour markets are expected to ease. This should moderate wage growth and also increase competitive pressures, making it more difficult for businesses to pass on higher costs to consumers," the Bank of Canada said.

The latest macro data supports the idea that inflation will come down to 3% in the middle of this year, according to the central bank.

On the global front, the Bank of Canada said there were no major surprises, except for the higher-than-expected inflation numbers from the U.S. and Europe.

"Global growth continues to slow, and inflation, while still too high, is coming down due primarily to lower energy prices. In the United States and Europe, near-term outlooks for growth and inflation are both somewhat higher than expected in January. In particular, labour markets remain tight, and elevated core inflation is persisting," the Bank said. "Commodity prices have evolved roughly in line with the Bank's expectations, but the strength of China's recovery and the impact of Russia's war in Ukraine remain key sources of upside risk. Financial conditions have tightened since January, and the U.S. dollar has strengthened."

The Bank of Canada is the first major central bank to pause its tightening cycle. And it comes after Canada pursued an aggressive tightening cycle with other central banks around the world, increasing its policy rate at each meeting since March 2022.

The rate will remain on hold if economic developments evolve as expected, the Bank added. But more rate hikes in the future are not ruled out.

"Governing Council will continue to assess economic developments and the impact of past interest rate increases, and is prepared to increase the policy rate further if needed to return inflation to the 2% target. The Bank remains resolute in its commitment to restoring price stability for Canadians," the statement said.

With no major surprises in the statement, gold priced in Canadian dollars continued to trade in line with the daily movements,  last at $2,508.06, up 0.60% on the day. 

"This shouldn't come as a surprise given that at the 25 January BoC policy meeting, the governing council stated that it expects to 'hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases' at upcoming meetings," said ING's chief international economist James Knightley. "The data since then has shown inflation undershooting expectations despite remaining well above the 2% target and GDP growth stalling at 0%, significantly below the 1.6% annualised rate expected."

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