Market Wire: Bank of Canada Stays on Hold, Upgrades Growth Forecasts
As had been widely expected, the Bank of Canada held its benchmark overnight rate at 4.50 percent this morning, while retaining a relatively hawkish bias in its communications. In the accompanying statement, officials said, “As more households renew their mortgages at higher rates and restrictive monetary policy works its way through the economy more broadly, consumption is expected to moderate this year. Softening foreign demand is expected to restrain exports and business investment. Overall, GDP growth is projected to be weak through the remainder of this year before strengthening gradually next year. This implies the economy will move into excess supply in the second half of this year”.
Price pressures are seen subsiding: “Recent data is reinforcing Governing Council’s confidence that inflation will continue to decline in the next few months. However, getting inflation the rest of the way back to 2 percent could prove to be more difficult because inflation expectations are coming down slowly, service price inflation and wage growth remain elevated, and corporate pricing behaviour has yet to normalize”.
Central bankers made modest updates to the forward guidance language used in the prior statement, saying the “Governing Council continues to assess whether monetary policy is sufficiently restrictive to relieve price pressures and remains prepared to raise the policy rate further if needed”.
In January, Bank projections showed the economy expanding at a 0.5-percent annualized pace in the first quarter, with rising rates intersecting with elevated debt levels to slow consumer spending and weigh on overall activity levels. That has not played out in reality. Private-sector real-time indicators suggest growth may have been five times higher than this, with household consumption remaining robust and a number of other factors—including exports to the still-roaring US economy—holding up well.
According to updated forecasts contained in the Monetary Policy Report, the economy is expected to expand 1.4 percent this year—up from the 1.0 percent previously estimated—and 1.3 percent in 2025, down from the previous 1.8 percent. Inflation is seen running at 3.5 percent by year end, down modestly from January’s 3.6 percent forecast, but is then expected to fall to 2.3 percent in 2024, falling into the Bank’s target range, for all intents and purposes.
The Canadian dollar climbed roughly 30 basis points and two-year yields rallied in the moments after the announcement as traders reassessed the likelihood of rate cuts in the back half of the year. Canadian two-year yields are holding 24 basis points lower than their US equivalents, while the ten year spread favours the US by 52 basis points.
When situated in a broader context, the Bank appears to be taking recent signs of economic resilience in stride, with the “long and variable lags” mantra that often dominates monetary policy discussions clearly visible in the background. Policymakers—like most economists and market strategists—don’t believe this period of stability will last, and expect a more profound slowdown to begin unfolding in the second half of the year. This relatively downbeat outlook is likely to keep the Canadian dollar on the defensive, in the absence of a sharply dovish turn from central bankers in the US.