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Bank of Canada to announce interest rate decision this morning



The Bank of Canada, under the leadership of Governor Tiff Macklem, has once again kept its policy rate unchanged, marking the sixth consecutive meeting without any alterations. This decision comes amidst signals from officials indicating a looming possibility of rate cuts, although they express the need for further evidence of slowing inflation.


Macklem emphasized the importance of sustained progress towards price stability, stating, "We are seeing what we need to see, but we need to see it for longer to be confident that progress toward price stability will be sustained."


Market expectations aligned with the decision to hold the benchmark overnight rate steady at five per cent, a consensus reflected in both market sentiments and economist surveys conducted by Bloomberg.


Despite the anticipation of potential rate cuts in June, spurred by expectations from economists surveyed by Bloomberg, recent shifts in overnight swaps traders' bets have tempered these expectations. This adjustment follows a disappointing U.S. inflation reading and the Bank of Canada's cautious statement, leading to decreased odds of a 25-basis-point cut in June.


While officials acknowledge that inflation remains "too high," data since January have bolstered their confidence in the gradual slowdown of price pressures. However, Macklem highlighted that further declines in core inflation are a recent development, emphasizing the need for assurance that this is not merely a temporary dip.


The central bank's communications indicate a deliberation on the timing of potential easing measures, contingent upon the inflation trajectory in the coming months. Macklem acknowledged the possibility of a rate cut in June but emphasized the importance of observing continued progress in mitigating price pressures.


Economists analyze Macklem's remarks, suggesting that the bank may consider a rate cut in June if core prices exhibit subdued month-over-month changes in the upcoming months. However, uncertainties remain, particularly regarding developments in the United States, which could influence the Bank of Canada's stance.


The Canadian dollar experienced losses following the announcement, trading near its lowest level since November against the U.S. dollar. Concurrently, yields on benchmark Canada two-year bonds rose, influenced by U.S. inflation data.


Looking ahead, the Bank of Canada anticipates economic growth of 1.5 per cent in 2024, up from previous projections. Inflation is forecasted to decelerate to 2.2 per cent by year-end, with officials expecting it to reach the 2 per cent target by 2025. Additionally, policymakers have raised their estimate for the neutral rate, although its impact on current monetary policy is deemed minimal by Macklem.


While members of the bank's governing council foresee potential rate cuts in 2024, uncertainties persist regarding the timing and conditions for initiating such measures. Policymakers revised their first-quarter growth estimate upward to 2.8 per cent annualized, reflecting cautious optimism amidst evolving economic conditions.


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