Central bank holds rate at 5% but sees progress on inflation
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The Bank of Canada left the key overnight interest rate at five per cent Wednesday, but governor Tiff Macklem said a June cut was “within the realm of possibilities.”
Macklem said in a press conference after the decision that central bankers are confident in the inflation progress they’re seeing and have seen since January, including inflation expectations and corporate pricing activities — but they need to see it for longer to make sure it is sustained rather than a blip.
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“The further decline we’ve seen inflation is very recent. We need to be assured it’s not just a temporary dip,” Macklem said.
While the consumer price index and core inflation have eased in recent months, inflation is “still too high and risks remain,” the central bank said in an April 10 statement, adding that its governing council will wait for “evidence that this downward momentum is sustained” before moving rates lower.
“Governing Council is particularly watching the evolution of core inflation, and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.”
CPI inflation slowed to 2.8 per cent in February, with easing in price pressures becoming more broad-based across goods and services.
“However, shelter price inflation is still very elevated, driven by growth in rent and mortgage interest costs,” the central bank said in a statement.
Core measures of inflation, meanwhile, which had been running around 3.5 per cent, slowed to just over three per cent in February, and 3-month annualized rates are suggesting downward momentum. The central bank expects CPI inflation to be close to three per cent during the first half of this year, move below 2.5 per cent in the second half, and reach the two per cent inflation target in 2025.
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Andrew DiCapua, senior economist at the Canadian Chamber of Commerce, said energy price volatility remains a wildcard for the central bank, despite a more optimistic GDP forecast and anticipation of reduced inflation by year’s end.
“At their June meeting, they’ll have over three months of inflation data, aided by survey results trending in the right direction,” DiCapua said.
When the central bank decision-makers met to discuss last month’s policy rate decision, they did not all agree on what economic signals they would need to see to start cutting rates, a summary of those deliberations revealed. However, they did agree that the first cut would likely be in 2024.
The “diversity of views” included both when there would likely be enough evidence to cuts rates, and how to weight the risks to the central bank’s economic outlook.
Economists, too, have varied in their projections, with some expecting the first rate cut to come as early as June and others predicting September as the best-case scenario. Some prognosticators recently pushed their forecasts out further as the economy appeared in better shape than expected and the risk of inflation remained.
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The Bank of Canada forecasts gross domestic product growth of 1.5 per cent in 2024, 2.2 per cent in 2025, and 1.9 per cent in 2026 and said the strengthening economy will absorb excess supply in 2025 and 2026.
The central bank has revised up its forecast for global GDP growth to 2.75 per cent in 2024 and about 3 per cent in 2025 and 2026.
“Inflation continues to slow across most advanced economies, although progress will likely be bumpy,” the Bank of Canada statement said, adding that inflation rates are nevertheless projected to reach central bank targets in 2025.
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Bank of Canada Macklem said at an previous rate-setting announcement this year that he doesn’t expect rates to come down as quickly as they went up beginning in the spring of 2022.
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2024-04-10 14:48:45Z
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