Central bank holds firm for now but hints at easing as inflation pressures subside
The Canadian dollar slipped after the Bank of Canada held its key interest rate at a near 23-year high of 5%, despite Governor Tiff Macklem hinting at potential rate cuts in June.
The Loonie weakened against the US dollar, trading down 0.80% at 1.3675 or 73.13 US cents, shortly after the announcement. Traders also revised their expectations for a June cut, though a July cut remains highly anticipated.
While maintaining the rate at 5%, Macklem opened the door to rate reductions, replying “Yes" to reporters when asked at a press conference on Wednesday.
Although inflation has been falling in recent months, at 2.8%, it is still above the bank's 2% target.
"We just need to see it for longer to be confident that we are clearly on a path to 2% inflation, and when we are at that point, it will be appropriate to reduce our interest rate," Macklem said in the press conference on Wednesday.
The central bank had previously indicated it could start cutting rates this year, and Macklem's comments represent the clearest hint yet about a potential timeline for reductions that have been held steady at 5% since July 2023.
In its latest monetary policy report, the BoC raised its 2024 economic growth forecast to 1.5%, up from the previous 0.8% projection. It cited strong immigration flows and increased household spending as reasons.
"Strong population growth is increasing consumer demand as well as the supply of workers, and spending by households is forecast to recover through the year," Macklem said.
However, the elevated interest rate is fuelling a housing crisis, with shelter price inflation remaining elevated and putting pressure on the government.
Market reactions were mixed. Traders reduced their expectations for a June rate cut to 56%, down from 84% before the announcement, though a July reduction remains fully anticipated.
Economists and analysts have also forecasted that the BoC will lead the US Federal Reserve in rate cuts, as economic data in both countries has been diverging. Macklem said he did not see a big impact from US inflation on Canada.
"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," said Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO Capital Markets.
"Sustained downward momentum in core inflation within the next CPI print will be key in determining whether the process can start at the next meeting in June," CIBC senior economist Andrew Grantham told Reuters.
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