Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud. 

Bottom line

The Bank of Canada kept its policy rate to 5.00% and will continue quantitative tightening (QT), in line with our expectations.

The key message in today’s decision is that the BoC, while less concerned about inflation, is not yet ready to consider rate cuts. The Bank wants to see confirmation that the recent easing in inflation is sustained before easing. As we have pointed out on many occasions, the breadth of the inflation process, with about 40% of the CPI components still increasing at more than 3%, and the momentum in the BoC still above 3% are the main focus when it comes to inflation.

Overall, in our view, the tone of the Communiqué suggests that the BoC is close to declare victory in its fight against inflation. We believe the conditions will be in place by the June meeting for BoC to cut its policy rate. The BoC is unlikely to consider lowering its policy rate until the inflation is viewed as sustainably below 3%. This likely means that its preferred core inflation measures and their momentums are around or below 2.5%, which we do not expect until May 2024.

After that, the focus should turn to what will be the terminal rate in the easing cycle. As we have said repeatedly (see What happened to the recession? The role of the policy stance and demographics), and confirmed today by the BoC, the neutral rate is higher than pre-pandemic. This means that the extent of the rate cuts could be limited, meaning that interest rates are likely to be higher than pre-pandemic for a long period.

The BoC leaves its policy rate at 5.00%, as expected. It will also continue its quantitative tightening policy. In its statement, the BoC notes that “while inflation is still too high and risks remain, CPI and core inflation have eased further in recent months”, suggesting the BoC sees encouraging signs of progress on inflation and is lss concerned by the risks to the inflation outlook than at the March meeting. In addition, the statement the BoC notes that it will continue to “be looking for evidence that this downward momentum is sustained”. This indicates that if inflation remains on the same downward trends, rates cuts could be coming soon. The BoC also continue to make it clear that it “remains resolute in its commitment to restoring price stability for Canadians,” suggesting that it stands ready to act if inflationary pressures do not ease and remain stubbornly sticky.

The BoC sees “the global economy to continue growing at a rate of about 3%, with inflation in most advanced economies easing gradually”. Growth in the US has been stronger than expected, supported by resilient consumer, business and government spending. However, growth is expected to moderate somewhat in the second half of the year. The BoC notes that bond yields are higher than previously expected but that narrower credit spreads and continued rise in equity prices left financial conditions unchanged. However, oil prices are slightly higher than expected, which could potentially put pressures on inflation. The Bank revised up its forecast for global GDP growth to 2.75% in 2024 (from 2.5%) and about 3% in 2025 and 2026. (from 2.7%).

In the Canadian economy, after stalled growth in the second half of 2023, but is expected to pick up in the second half of 2024. The BoC sees the economy operating in excess supply, as evidence by a rising unemployment rate leading to a moderation in wage growth. The BoC expects growth to improve in 2024, thanks to consumer spending and population growth. Investment, both residential and non-residential, is also expected to improve. Overall, the BoC upgrade its forecasts and now see the growth rates of 1.5% in 2024 (from 0.8%), 2.2% in 2025 (from 2.4%), and 1.9% in 2026. The BoC expects the strengthening economy to gradually absorb excess supply through 2025 and into 2026.

The BoC notes that inflation slowed to below 3% in February and “easing in price pressures becoming more broad-based across goods and services”. However, the BoC also acknowledge that shelter costs continue to be too high. The central bank notes that recent dynamic suggesting further easing in the coming months. The outlook for inflation is little changed and the Bank expects CPI inflation to be close to 3% during the first half of this year, move below 2½% in the second half, and reach the 2% inflation target in 2025.


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Independent Opinion

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