Bank of Canada Holds Rate at 5%, Hints at Potential June Cut

The Bank of Canada held its benchmark interest rate steady at 5% on Wednesday, amidst signs inflation is easing. Officials acknowledged that a rate cut in June is “within the realm of possibilities.”

This decision aligns with economist expectations, given recent signs of easing price pressures, stalled economic growth, and a softening labor market. Bank of Canada Governor Tiff Macklem expressed confidence, based on recent data, that “inflation will continue to come down gradually even as economic activity strengthens.”

Signs of Easing Inflation:

• Annual inflation has cooled significantly, reaching 2.8% in February.
• The Bank of Canada’s preferred core inflation metrics have begun to ease, hovering above 3% in February.
• The Bank of Canada’s updated Monetary Policy Report (MPR) revised inflation expectations downward, predicting a decline to 2.2% by year-end 2024.

Shifting Policy Stance:

The Bank of Canada acknowledged progress in their rate decision statement but is still looking for evidence of sustained downward momentum in inflation. This marks a shift in tone from previous pronouncements, with less emphasis on core inflation’s “persistence.”

The MPR also revised upward its expectations for Canadian economic output in 2024, citing strong population growth and a rebound in consumer spending.

Potential Rate Cut on the Horizon?

During a press conference, Macklem acknowledged the possibility of a June rate cut, a departure from recent messaging. He noted the Governing Council’s discussion about lowering the policy rate, with some “diversity of views” but a consensus to hold at 5% for now.

While encouraged by progress, policymakers need to be certain this easing is not temporary. “We are seeing what we need to see, but we need to see it for longer to be confident that progress toward price stability will be sustained,” said Macklem.

Market Reaction and Risks:

Traders adjusted expectations for a first 25-basis-point rate cut in June, with a decline from 84% to 56% pre-announcement. A July cut is now fully priced in.

The Bank of Canada’s statement suggests a gradual approach to future rate cuts. However, core inflation easing in the next two Statistics Canada consumer price index reports could trigger a June cut at the next Bank decision on June 5th.

Risks to this timeline include:

• Rising U.S. inflation, potentially impacting the Federal Reserve’s rate cut plans. This could complicate things for the Bank of Canada due to the intertwined nature of the two economies.
• Continued high shelter price inflation due to rising rents and mortgage costs.

The Bank of Canada will continue to monitor inflation expectations, corporate pricing behavior, wage growth, and labor market developments to determine future rate adjustments. While they expect some pickup in home values this year, a significant price surge could reignite inflation concerns.

Overall, the Bank of Canada’s decision signals cautious optimism about inflation and opens the door for potential rate cuts in the near future.