Bank of Canada Keeps Rates on Hold, Says Too Early To Consider a Cut

bank of canada

The Bank of Canada's decision to hold its overnight interest rate at 5 per cent follows a stretch of hikes that saw it reach a 22-year high between March 2022 and July 2023. Photo: Justin Tang/The Canadian Press

The Bank of Canada (BoC) kept its key overnight rate steady at 5 per cent on Wednesday as expected and said it was still too early to consider a cut, given the persistence of underlying inflation.

The news helped push the Canadian dollar up 0.4 per cent to 1.3540 per U.S. dollar, or 73.86 U.S. cents.

Shortly after the rate announcement, data showed that Canadian money markets now see a 23 per cent chance of a rate cut in April, down from 43%. They have also pushed back bets for a fully priced in cut to July from June.

“It sounds as if the Bank of Canada is very much following the Federal Reserve footsteps in expressing a need for greater confidence in the pace of disinflation,” said Karl Schamotta, chief market strategist at Corpay.

“And that suggests that we’re going to need to see additional data releases before they pull the trigger on cutting rates.”

The BoC increased rates by 475 basis points to a 22-year high between March 2022 and July 2023 and has kept them on hold since then in its efforts to cool inflation while avoiding pushing the country into a recession.

Inflation has gradually been falling and markets had been expecting a cut by June.

Governor Tiff Macklem said more time was needed to ensure inflation fell towards the central bank’s 2 per cent target.

“It’s still too early to consider lowering the policy interest rate … future progress on inflation is expected to be gradual and uneven,” he said in opening remarks to reporters.

“It’s too early to loosen the restrictive policy that has gotten us this far.”

A majority of economists in a Reuters poll last week forecast the central bank would start cutting interest rates in June.

Inflation largely stayed above 3 per cent for most of last year but eased to 2.9 per cent in January. Macklem reiterated that the bank expected inflation to be close to 3 per cent through the middle of 2024 before easing in the second half.

“The path back to our 2 per cent target will be slow, and progress is likely to be uneven,” he said.

Core inflation measures are in a range of 3 per cent to 3.5 per cent and the share of CPI components growing above 3 per cent has declined but is still above the historical average, the central bank said in a statement.

“Governing Council remains concerned about the persistence of underlying inflation and we want to see a further deceleration in core inflation in the coming months,” Macklem said.

He reiterated his comments from January’s policy announcement that the discussion within the Governing Council was shifting from whether the rates were restrictive enough to how long they needed to stay at their current level.

“They are in no rush to do anything,” said Derek Holt, vice president of capital market economics at Scotiabank.

(Reporting by Promit Mukherjee, editing by David Ljunggren and Nick Zieminski)


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