Bank of Canada holds the policy rate today

The Bank of Canada (BoC) maintained its target for the overnight rate today at 5%. The rate hold is not a surprise and neither is the fairly neutral tone of the BoC’s statement. It clearly isn’t ready to start cutting interest rates yet.

CIBC Capital Markets says the BoC appears to be moving very slowly towards lowering interest rates. They note that in today’s statement, the BoC acknowledged inflation has “eased further” in recent months and didn’t mention current concerns about the “persistence” of core inflation. Although wage pressures are easing and employment growth is tracking below the pace of increase in the population, the stronger-than-expected growth in gross domestic product (GDP) was attributed to population growth, government spending and a recovery in household consumption. As we look forward, the BoC would like to see evidence that the current momentum around inflation and economic growth is "sustained" before starting to cut interest rates.

Paola Moquillaza-Bello, Senior Analyst, Asset Allocation & Currency Management at CIBC Asset Management says today’s rate announcement was widely expected by markets and confirms the BoC did not provide hints of rate cuts coming as of yet. “The gradual rebalancing of the Canadian economy has pursued, but at a slower pace than anticipated by the BoC in its previous forecast materials. That said, inflation has steadily decreased over the last six months from 3.8% in September 2023 to 2.8% in February 2024. If sustained, the progress made on the inflation side provides reasonable grounds for Canadians to expect to see cuts later this year, but perhaps not as many as the market is currently discounting.”

Looking forward, Ms. Moquillaza-Bello notes “The BoC revised its GDP forecast for 2024 upward and now expects Canadian GDP will grow by 1.5% in 2024, almost double its previous forecast of 0.8%—but still below estimated potential growth. Inflation is currently expected to decrease to 2.2% in Q4/2024 and reach 2.1% by the end of 2025.”

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