Bank of Canada holds rates unchanged at 5.00%. Drops language about being prepared to hike

  • The market was pricing in a 15% chance of a rate cut
  • BOC “still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation”
  • BOC statement no longer says it “remains prepared to raise the policy rate further if needed”
  • The Canadian economy stalled since the middle of 2023 and growth will likely remain close to zero through the first quarter of 2024
  • Economic growth is expected to strengthen gradually around the middle of 2024
  • BOC forecasts GDP growth of 0.8% in 2024
  • BOC expects inflation to remain close to 3% during the first half of this year before gradually easing, returning to the 2% target in 2025
  • Core measures of inflation are not showing sustained decline
  • Consumers have pulled back their spending in response to higher prices and interest rates
  • Economy now looks to be operating in modest excess supply
  • Labour market conditions have eased, with job vacancies returning to near pre-pandemic levels and new jobs being created at a slower rate than population growth
  • Growth in the United States has been stronger than expected but is anticipated to slow in 2024
  • Inflation rates in most advanced economies are expected to come down slowly, reaching central bank targets in 202
  • Forecast for for 2.8% inflation this year is down from 3.0% in Oct
  • There was a clear consensus to maintain our policy rate at 5%
  • We are trying to balance the risks of over- and under-tightening
  • We need to see further and sustained easing of core inflation

USD/CAD rose on the statement as it removed the line about being prepared to raise rates if needed. However Macklem in the opening statement of the press conference (which was published with the release in a chance in protocol) said:

That doesn’t mean we have ruled out further policy rate increases. If new developments push inflation higher, we may still need to raise rates. But what it does mean is that if the economy evolves broadly in line with the projection we published today, I expect future discussions will be about how long we maintain the policy rate at 5%.

The market is still taking that as dovish and I agree with that take. The next CPI report from Canada will be a big one and I expect it will show the drop in core inflation the BOC wants to see, which will mean a first cut in March or April, though the market isn’t putting much weight on a March cut (just 7%).

The BOC will hold a press conference at 10:30 am ET.

This article was written by Adam Button at www.forexlive.com. Source