The central bank is getting a clearer inflation outlook
The Bank of Canada is poised to keep interest rates on hold at 5% in today’s decision, marking the fifth consecutive meeting without a change.
The move is projected as the likelihood of a recession diminishes, providing the central bank with additional time to monitor inflation trends prior to making any adjustments to borrowing costs.
Financial markets and analysts are in agreement, anticipating that governor Tiff Macklem and his team will opt for a wait-and-see approach, seeking further proof that their strategies to curb inflation are effective.
Bank of Montreal (BMO) chief economist Doug Porter said "there isn’t a strong argument for them to come out as especially dovish. They don’t really have to change their tune," indicating a consensus expectation for the BoC to maintain its current policy direction without signalling imminent rate cuts.
Since removing its bias towards rate hikes in January, no significant economic data has emerged to prompt a policy shift by the bank. The Canadian economy is experiencing slow growth, but the situation is not deteriorating rapidly, with an expansion rate of 1% at the end of last year. Financial experts now increasingly foresee a gentle easing of the economy, rather than a harsh downturn.
Read next: Canada's GDP growth spurs BoC caution
The improving economic outlook in the United States, Canada’s biggest trading partner, is also influencing monetary policy expectations, delaying predictions of when the Federal Reserve might lower rates.
Analysts surveyed by Bloomberg anticipate the BoC might start reducing rates by June, with expectations of lowering the policy rate to 3% by the end of 2025. The probability of a rate cut at the bank's April meeting is seen as a one-in-three chance by traders, with a significant cut expected by July.
"We expect the bank will want to hold its cards close to its chest until the April monetary policy report. It’s too early for them to provide a lot of guidance on when lower rates might happen,” said Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce (CIBC).
Although the annual inflation rate slowed to 2.9% in January, core inflation remains stubbornly high. The BoC has indicated it will not consider rate cuts until it sees sustained signs of inflation moving back towards its target.
Highlighting the focus on how the bank assesses inflation trends, Pacific Investment Management economist Tiffany Wilding said that the Boc should “be confident that inflation’s coming back to target.”
Make sure to get all the latest news to your inbox on Canada’s mortgage and housing markets by signing up for our free daily newsletter here.
