As widely anticipated by markets, the Bank of Canada decided to maintain its overnight target rate at 5.00%, a position it has held since July.
Amid the expected rate hold, market attention turned to various “dovish” signals from the central bank, notably the omission of its previous commitment to “remain prepared to raise the policy rate further if needed” in today’s statement.
During the post-announcement press conference, BoC Governor Tiff Macklem affirmed, “there was a clear consensus to maintain our policy at 5%,” with discussions shifting from the question of whether monetary policy is restrictive enough to how long to maintain the current stance.
“While the Bank isn’t signaling a change in policy yet, markets are taking the lead,” noted economist James Orlando of TD Economics. He points to the economy “flatlining” since summer and the job market returning to balance. Orlando also suggests that the BoC’s quantitative tightening policy might have gone too far, with market overnight rates drifting from the Bank’s target rate.
Bond markets are indicating a 33% chance of a quarter-point rate cut as early as March and a 55% chance of a 50-basis-point rate cut by June.
Despite concerns about inflation expectations, the Bank emphasized its worry about the inflation outlook and the “persistence of underlying inflation.” The Bank aims to see sustained easing in core inflation, projecting that headline inflation won’t reach the desired 2% target until 2025.
For the first time, the Bank acknowledged the impact of high shelter costs, identifying them as the major contributors to above-target inflation. Orlando observed a shift in the Bank’s tone towards stronger acknowledgment of the challenges posed by shelter costs.
The Bank’s Monetary Policy Report highlighted factors contributing to elevated shelter costs, including mortgage interest rates boosting inflation due to historically low rates and a rapid increase in policy rates through 2022 and 2023. Strong population growth was also cited as a factor maintaining pressure on the “structural supply constraint” in housing.
In its updated economic projections, the Bank revised down its GDP growth forecasts slightly for 2023, with a full-year average of 1%. The forecasts for annual economic growth in 2024 and 2025 were adjusted to 0.8% and 2.4%, respectively. Inflation forecasts remained largely unchanged.
The Bank of Canada’s next rate decision is scheduled for March 6, 2024.