Bank of Canada Maintains Interest Rate Steady, Eyes Future Reductions Amid Inflation Slowdown

, , , , - Mario Conte - April 10, 2024

In a steadfast move, the Bank of Canada has once again maintained its key interest rate at 5%, marking the sixth consecutive hold since July. This decision underscores the bank's cautious optimism, as it awaits more definitive signs of sustained inflation slowdown before contemplating rate reductions. Despite the persistent high inflation rates, there is a silver lining as core inflation indicators, which exclude volatile sectors like food and energy, have shown a downward trend recently.

The Bank of Canada acknowledges the positive direction but remains vigilant, seeking further evidence to ensure that the journey towards price stability is enduring. During a press conference, Bank of Canada Governor Tiff Macklem conveyed the anticipation surrounding the potential lowering of the policy interest rate. "We are on the right path, but we need to monitor these trends over a longer period to gain confidence that our progress towards price stability is stable," Macklem remarked, emphasizing the recent decline in core inflation as promising yet preliminary.

Inflation cooled to 2.8% in February, reflecting a deceleration across various sectors, including goods, food, clothing, and services. However, the high costs of rent and mortgage interest remain significant contributors to the overall inflationary pressure. The bank's projections indicate a gradual approach to its 2% inflation target, anticipated to be achieved in 2025, alongside expectations of robust GDP growth driven by population increase and higher household spending. As the bank deliberates on the duration of maintaining the current policy rate, the focus is on the durability of the recent easing in core inflation.

Since initiating a series of interest rate hikes in March 2022 to combat inflation, resulting in 10 adjustments in less than two years, the bank now contemplates the timing for a policy shift. Economist Royce Mendes of Desjardins Capital Markets interprets the bank's stance as a precursor to imminent rate cuts, potentially commencing in the upcoming June meeting. Mendes warns of the risks of a protracted high-rate environment, suggesting that the bank's strategy might avert a recession.

He anticipates gradual rate reductions, signaling a positive outlook for the Canadian economy. Contrasting economic indicators between Canada and the United States indicate that the Bank of Canada may precede the U.S. Federal Reserve in reducing rates, especially given the recent uptick in U.S. inflation. Governor Macklem, however, downplays the immediate impact of U.S. inflation trends on Canada's monetary policy decisions, hinting that a rate cut in June remains a viable option.

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