Bank of Canada holds the policy rate today

As widely expected, the Bank of Canada (BoC) maintained its target for the overnight rate today at 5%.

What does a rate hold mean for the Canadian economy?

Overall, data points to an economy in modest excess supply. Although the Canadian economy grew in the fourth quarter by more than expected (likely boosted by a strong increase in exports), the pace remains weak and below potential. Employment continues to grow slower than the population and there are now signs that wage pressures may be easing.

CIBC Capital Markets suggests the BoC didn’t make any great leaps towards an actual rate cut today. The BoC confirmed the overall pace of inflation has slowed but is not yet at the target rate of 2%. More progress on inflation is needed for the BoC to start considering rate cuts. It maintained concerns that underlying inflation pressures remain persistent.

How did markets react to today’s rate announcement?

David Wong CFA, FRM, Chief Investment Officer, Managing Director and Head, Total Investment Solutions at CIBC Asset Management confirms the market reaction was relatively muted in the minutes after the announcement. “While there was a sell-off in bonds at the start of the year that unwound the aggressive rate cuts priced in throughout Q4 2023, the Canadian bond market was strong in the weeks leading up to today’s announcement. Canadian equities have been modestly positive so far this year, up just over 2% to date.”

When it comes to why the BoC is not yet ready to start cutting rates, Mr. Wong notes “the BoC is currently caught in a catch-22 as inflation remains a key concern while growth is sluggish. Mortgage and rent inflation remain high, and the Bank does not want to do anything to add to the problem. This tension could create some market volatility in the near term as additional economic data comes out.”

Mr. Wong says “For investors, this means multi-asset diversification will be especially important. Bonds could play a very critical role this year if there is any slowdown in the economy. With yields at 15-year highs, there is room for capital appreciation should the soft-landing euphoria turn into hard-landing reality.”

As we look ahead, CIBC Capital Markets says Canadians should expect a fresh forecast in April that will likely show enough optimism in the battle against inflation to set markets up for rate cuts starting in June—as long as the data points in that direction.

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