The Bank of Canada is holding its benchmark interest rate at 5 percent for the sixth consecutive time since July, saying it needs to see evidence that “downward momentum” in inflation is sustained before it will cut rates.
Although inflation remains high and “risks remain,” the central bank said it has begun to see the economic conditions necessary to convince it to drop interest rates.
Economic data since the beginning of the year has boosted the bank’s confidence that inflation will continue to slow despite a rising economy, Bank of Canada Governor Tiff Macklem said.
“I realize that what most Canadians want to know is when we will lower our policy interest rate,” Mr. Macklem said in an April 10 statement. “What do we need to see to be convinced it’s time to cut? The short answer is we are seeing what we need to see, but we need to see it for longer to be confident that progress toward price stability will be sustained.”
He described the decline in core inflation as “very recent,” saying the bank needs to be sure this “is not just a temporary dip.”
The central bank expects core inflation to continue to ease gradually, but with gas prices on the rise, the consumer price index (CPI) is likely to remain around 3 percent over the next few months, Mr. Macklem said.
The central bank’s decision to hold its key rate steady comes as no surprise to economists who are widely forecasting a rate cut at the Bank of Canada’s next policy announcement this summer.
Bank of Montreal managing director Benjamin Reitzes said while the central bank decided to hold interest rates at 5 percent, it was “mildly more dovish,” by pointing out core inflation trends and the softening labour market.
“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,” Mr. Reitzes said in note to investors. “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.”
TD director and senior economist James Orlando is predicting a rate cut in July.
“Even though inflation has moved within the BoC’s 1 percent to 3 percent target range over the last few months, markets have become more cautious on the timing of cuts,” Mr. Orlando said in his analysis.
“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.”
The Bank of Canada, which is continuing its policy of quantitative tightening, has also released its quarterly monetary policy report. The report hints that the chance of a “soft landing,” in which inflation slows without a notable economic downturn, has increased.
Economic growth is expected to be healthier than previously anticipated this year. The central bank is forecasting the economy to grow by 1.5 percent this year and by roughly 2 percent in 2025 and 2026.
“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,” Mr. Macklem said. “Spending by governments also contributes to growth, and US strength supports Canadian exports. The strengthening economy will gradually absorb excess supply through 2025 and into 2026.”
Global growth has also been revised up to 2.8 percent for this year.
