The Bank of Canada announced Wednesday that it held its target for the overnight rate at 5%, with the Bank Rate at 5¼% and the deposit rate at 5%. The Bank is continuing its policy of quantitative tightening.
“The Bank expects the global economy to continue growing at a rate of about 3%, with inflation in most advanced economies easing gradually. The US economy has again proven stronger than anticipated, buoyed by resilient consumption and robust business and government spending. US GDP growth is expected to slow in the second half of this year, but remain stronger than forecast in January. The euro area is projected to gradually recover from current weak growth. Global oil prices have moved up, averaging about $5 higher than assumed in the January Monetary Policy Report (MPR). Since January, bond yields have increased but, with narrower corporate credit spreads and sharply higher equity markets, overall financial conditions have eased,” it said in a news release.
Andrea Piacquadio
“The Bank has revised up its forecast for global GDP growth to 2¾% in 2024 and about 3% in 2025 and 2026. Inflation continues to slow across most advanced economies, although progress will likely be bumpy. Inflation rates are projected to reach central bank targets in 2025.
“In Canada, economic growth stalled in the second half of last year and the economy moved into excess supply. A broad range of indicators suggest that labour market conditions continue to ease. Employment has been growing more slowly than the working-age population and the unemployment rate has risen gradually, reaching 6.1% in March. There are some recent signs that wage pressures are moderating.”
The Bank said economic growth is forecast to pick up in 2024. This largely reflects both strong population growth and a recovery in spending by households. Residential investment is strengthening, responding to continued robust demand for housing. The contribution to growth from spending by governments has also increased. Business investment is projected to recover gradually after considerable weakness in the second half of last year. The Bank expects exports to continue to grow solidly through 2024.
“Overall, the Bank forecasts GDP growth of 1.5% in 2024, 2.2% in 2025, and 1.9% in 2026. The strengthening economy will gradually absorb excess supply through 2025 and into 2026,” it said.
“CPI inflation slowed to 2.8% in February, with easing in price pressures becoming more broad-based across goods and services. However, shelter price inflation is still very elevated, driven by growth in rent and mortgage interest costs. Core measures of inflation, which had been running around 3½%, slowed to just over 3% in February, and 3-month annualized rates are suggesting downward momentum. The Bank expects CPI inflation to be close to 3% during the first half of this year, move below 2½% in the second half, and reach the 2% inflation target in 2025.”
Based on the outlook, Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet. While inflation is still too high and risks remain, CPI and core inflation have eased further in recent months. The Council will be looking for evidence that this downward momentum is sustained. Governing Council is particularly watching the evolution of core inflation, and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour. The Bank remains resolute in its commitment to restoring price stability for Canadians, added the Bank.
“The BoC remains steadfast in its desire to maintain rates at the current 5% level. It can justify this stance based on its upgrade to economic growth, while still expecting inflation to remain somewhat elevated over the coming months. This economic backdrop (alongside an upgrade to the neutral rate) affords the central bank more time to observe how inflation evolves, allowing it to gain greater confidence that price pressures have been tamed before it decides to cut its policy rate,” said James Orlando, Senior Economist at TD Economics.
“Market pricing is still holding onto hope for a June cut (~50%), but July (our call) is becoming more likely. Even though inflation has moved within the BoC’s 1% to 3% target range over the last few months, markets have become more cautious on the timing of cuts. While some of this is coming from the inflation warning in recent U.S. CPI prints, strong Canadian economic growth to start 2024 has been the main driver. And while spending data have been encouraging, we question how long this will last, especially with the labour market having started to come under pressure in March. Should economic growth weaken further and inflation remain on its current trajectory, we could see the BoC readying markets for the cuts in short order.”
Benjamin Reitzes, Managing Director, Canadian Rates & Macro Strategist at BMO Capital Markets, said the Bank of Canada was mildly more dovish noting the encouraging core inflation trend and softening labour market.
“However, policymakers need more evidence that this trend will continue before they’re willing to start easing. While June is still on the table, the coming CPI reports will need to be at least as good as what we saw in January and February. With the Fed seemingly on hold for potentially longer after a string of firm CPIs, the BoC will likely be a bit more cautious on the margin with rate cut timing,” he said.
Mario Toneguzzi
Mario Toneguzzi is Managing Editor of Canada’s Podcast. He has more than 40 years of experience as a daily newspaper writer, columnist, and editor. He was named in 2021 as one of the Top 10 Business Journalists in the World by PR News – the only Canadian to make the list. He was also named by RETHINK to its global list of Top Retail Experts 2024.
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