Bank of Canada holds interest rate steady, offers few hints about timing of cuts

The Bank of Canada held its benchmark interest rate steady for the fifth consecutive time on Wednesday, in a tight-lipped decision that offered few hints about the timing of future rate cuts.

The widely anticipated move keeps the policy interest rate at 5 per cent, a level reached last July after one of the most aggressive monetary policy tightening campaigns in Canadian history, aimed at tackling runaway price increases.

With the rate of inflation inching closer to the bank’s 2-per-cent target, and the Canadian economy stagnating under the weight of high borrowing costs, central bank officials don’t expect to raise interest rate further.

At the same time, they’re not yet willing to entertain rate cuts, which would offer relief to homeowners with mortgages and businesses struggling to pay debts.

“We need to give higher rates more time to do their work,” Bank of Canada Governor Tiff Macklem said at a news conference after the rate announcement.

“We don’t want to keep monetary policy this restrictive for longer than we have to. But nor do we want to jeopardize the progress we’ve made in bringing inflation down.”

Fed Chair Jerome Powell says he still expects rate cuts this year, but inflation progress ‘not assured’

With recent Consumer Price Index inflation data coming in better than expected, there had been speculation on Bay Street that the bank might use Wednesday’s announcement to pivot toward a more dovish stand and tee up interest-rate cuts in the coming months.

But the bank maintained a cautious tone, even leaving the final paragraph of its rate announcement unchanged from its previous statement in January.

Financial markets responded by paring bets on rate cuts in the spring and early summer. After the announcement, interest-rate swap markets, which capture market expectations about monetary policy, put the odds of an April rate cut at around 25 per cent, and the odds of a cut in June at around 65 per cent, according to Refinitiv data – both lower than in recent days.

Most analysts think it’s just a matter of time before the bank starts easing monetary policy. The key question – for bond traders, home buyers and business owners alike – is whether this will happen in April, June, July or perhaps even later.

“It wouldn’t be the bank’s style to hint today about a rate cut as far off as June, so we’ll stick with our call for a rate cut that month despite the lack of fresh dovish talk today,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said in a note to clients.

“Clearly, we’ll need more progress on inflation, and perhaps on wages, for that outcome, so we’ll be watching at the upcoming jobs and CPI data as we fine tune our forecasts.”

U.S. Federal Reserve Chair Jerome Powell offered a similar message on Wednesday in an appearance before a congressional committee. He said it will likely be appropriate to start lowering U.S. interest rates this year, but said Fed officials need more confidence that inflation is moving sustainably lower before easing monetary policy.

In Canada, the inflation picture has improved markedly over the past 18 months. After hitting a peak of 8.1 per cent in the summer of 2022, the annual rate of Consumer Price Index inflation came in at 2.9 per cent in January, back within the bank’s 1-per-cent to 3-per-cent target range.

This decline has happened without the economy entering a recession or a major spike in unemployment. That increasingly looks like the “soft landing” many economists thought would be impossible a year ago.

That doesn’t mean high interest rates aren’t taking a toll. GDP growth has been near zero for almost a year, and negative on a per-capita basis. Consumer spending and business investment are weak. Unemployment has moved up as companies have pulled back on hiring, and business bankruptcies have risen rapidly.

“It’s still going to be a story about a really sluggish economy, at least till we get to the midpoint of the year,” Dawn Desjardins, chief economist at Deloitte Canada, said in an interview.

“At that point, if all of these dominoes are lined up correctly, we will start to see the door open for interest-rate reductions and that should provide the support we need for the next turn up [in the economy].”

For the bank to start cutting rates, policy makers need to see a “sustained easing” in core inflation measures, which strip out the most volatile price movements, Mr. Macklem said. In January, the bank’s two preferred measures of core inflation moved lower, but were still well above 3 per cent.

And there are areas of the economy where prices continue to rise rapidly, putting strain on household finances. Shelter price inflation, in particular, remains a major concern for many households and a headache for the central bank.

Rising mortgage interest costs, which are directly tied to the bank’s past rate decisions, are the single biggest driver of CPI inflation today. But if the bank cuts rates, offering relief to homeowners with mortgages, it would likely cause home prices to rise, hitting housing affordability from another angle.

Likewise, Mr. Macklem has said the bank can do little to bring down rent inflation, which is being driven by a structural mismatch of housing supply and demand.

Alongside easing core inflation, the bank wants to see a slowdown in the speed of wage growth, which has been running in the 4-per-cent to 5-per-cent range for much of the past year. This pace isn’t consistent with 2-per-cent inflation, the bank maintains, given that companies tend to pass higher labour costs along to customers.

There are some signs that wage pressure may soon start to ease, Mr. Macklem said.

“With employment growing more slowly than population, the labour market has come into better balance. Job vacancies have returned to more normal levels, and the pace of hiring has been modest,” he said.

Mr. Macklem was asked during the press conference how quickly the bank would move once it begins cutting interest rates. He batted away the question, but did suggest that it could be a drawn-out process.

“I think it’s very safe to say we’re not going to be lowering rates at the pace we raised them,” he said.

The bank expects CPI inflation to remain near 3 per cent until the middle of the year, then to decline to around 2.5 per cent by the end of the year and back to the 2-per-cent target in 2025.

The next rate announcement is on April 10, at which time the bank will publish a new forecast for inflation and economic growth.