The BoC keeps rates unchanged for a sixth consecutive meeting even as officials signaled they’re getting closer to rate cuts but – like the Fed – need more evidence of slowing inflation. The Canadian central bank left the benchmark overnight rate unchanged at 5% on Wednesday, a move which was expected by markets and by economists in a Bloomberg survey.
In the updated forecast, the central bank revises 2024 CPI forecast down to 2.2% from 2.4% while the 2025 CPI forecast was unchanged at 2.1%. Meanwhile, 2024 GDP was revised higher to 2.1% from 1.6%, but 2025 CPI is revised down to 2.2% from 2.7%.
“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,” BoC Governor Macklem said in the prepared text of his opening statement.
Officials said that data since January boosted their confidence that price pressures are gradually slowing, even as they expect economic growth to increase. Still, Macklem called further declines in core inflation “very recent,” adding that the bank wants to “be assured this is not just a temporary dip.” In the months ahead, the BoC will be closely watching the evolution of core inflation. He says he remains focused on the balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behavior as indicators of where inflation is headed.
Overall, the communications confirm that officials’ discussions have turned to debating when interest rate cuts can begin this year, but that the decision hinges on how inflation evolves in the coming months.
Economists expect the BOC will be in a position to cut at the bank’s next meeting, on June 5. Traders in overnight swaps place over two-thirds odds of a 25 basis point cut at that meeting. July is fully priced, with traders seeing some chance of two cuts by that time.
Similar to the Fed, BOC officials also raised their estimate for the neutral rate by 25 basis points to a range of 2.25 to 3.25%; suddenly gradual increases in inflation targets are all the rage across “developed” central banks.
Canada’s progress on inflation is starting to diverge from the US, which saw upside surprises to price pressures in January and February.
As Bloomberg notes, last month, members of the bank’s six-person governing council said they expect to be able to start cutting rates in 2024 as long as the economy and inflation evolve roughly in line with their forecasts. But there was little consensus about when or how officials would know it was time to start easing.
