The Bank of Canada (BoC) decided to maintain its key overnight rate at 5% on Wednesday, aligning with expectations but simultaneously quelling borrowers’ hopes for a cut by highlighting persistent underlying inflation as a deterrent for rate reductions.
BoC Governor Tiff Macklem emphasized the premature nature of rate cuts given the current state of core inflation, which remains significantly high.
Despite the overall inflation rate standing at 2.9%, above the bank’s target of 2%, Macklem expressed the inherent slow pace and challenges of monetary policy in addressing these issues.
Following the rate decision, the Canadian dollar experienced an uplift, strengthening by 0.4% against the U.S. dollar.
Market reactions adjusted the likelihood of a rate cut in April to 23% from a previously higher expectation, indicating a shift in anticipation towards a later adjustment in policy rates, potentially by July.
Financial analysts, including Kyle Chapman of Ballinger Group, suggested that a rate cut by June would be unlikely without a near-term pivot towards achieving the 2% core inflation target more concretely.
The BoC’s aggressive rate hikes from March 2022 to July 2023 have significantly tempered inflation from its peak, yet challenges persist, especially from rising shelter and wage costs.
Governor Macklem underscored the necessity of a cautious approach to ensure a steady trajectory towards the 2% inflation target, admitting the expectation of a gradual and inconsistent progress.
This stance seemingly mirrors the Federal Reserve’s cautious approach towards rate adjustments, as noted by Karl Schamotta, a chief market strategist, highlighting the importance of future data releases in informing policy decisions.
Despite inflation’s slight ease to 2.9% in January from higher levels last year, Macklem projected inflation to hover around 3% into mid-2024, with a gradual decline anticipated in the latter half of the year.
The central bank remains vigilant regarding persistent inflationary pressures, aiming for a further deceleration in core inflation.
Macklem’s reiterated stance from January reflects an ongoing deliberation within the Governing Council, focusing not just on the sufficiency of current rates but on the duration necessary to maintain them, underscoring a commitment to transparent communication without conveying undue certainty.