No big surprises: The Bank of Canada bides its time, still too soon for rate cuts

Today, for the fifth time in a row, the Bank of Canada maintained its policy rate at 5%. This move was expected by economists and financial markets. The Bank is now firmly in wait-and-see-more-progress mode before it starts to lower its policy rate.

Canada’s economy

Headline growth in the fourth quarter of 2023 was a bit better than the Bank expected (1% annualized vs. its 0% forecast). That said, there’s still fundamental economic weakness lurking beneath the headlines: growth remains below its long-run potential; business investment is stagnating; and job growth isn’t keeping pace with the population. As the labour market comes back into better balance, wage pressures are beginning to ease.

Inflation

In January year-over-year CPI inflation eased to 2.9%, which is inside the Bank of Canada’s broader inflation control range, and getting closer to its ultimately 2% target.

Unfortunately, Governing Council is still worried about “the persistence in underlying inflation” because core inflation measures are still too high —running at 3% to 3.5% (on an annual and quarterly basis). There needs to be “further and sustained easing in core inflation” before the Bank will cut rates.

Elevated shelter costs are another major concern for the Bank. Rate cuts, which are coming eventually, could entice buyers back into the housing market, and sustain these stubborn price pressures.

Looking ahead

The Bank’s business and consumers surveys will be released on April 1, providing additional signals on inflation expectations and corporate pricing behaviour.

On April 10, the Bank will make its next rate announcement and release updated economic projections. Don’t expect a cut then either. Financial markets put the odds of a rate cut at roughly 30% at the April meeting, but the first 0.25% cut is not fully baked until July, and a summer cut is still where the smart money is.