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BoC to announce interest rate decision today, widely expected to hold key rate at 5%



The Bank of Canada, under the leadership of Governor Tiff Macklem, has chosen to maintain its policy rate for the fifth consecutive meeting. This decision keeps the benchmark overnight rate at five per cent, demonstrating the bank's commitment to assessing the economic landscape and providing stability.


In their recent statement, policymakers acknowledged positive strides in inflation while emphasizing that it's still premature to entertain the idea of rate cuts. The central bank's decision aligns with market expectations and the consensus among economists surveyed by Bloomberg.


Since the January decision, where the bank signaled a shift in discussions towards the duration of elevated borrowing costs, there have been "no big surprises" in economic data over the following six weeks. Governor Macklem reiterated that the policy rate of five per cent remains appropriate at this juncture, emphasizing that it's too early to contemplate a reduction in the policy interest rate.


Following the announcement, traders in overnight swaps adjusted their expectations, reducing bets on a rate cut in June. However, a cut is still fully anticipated for the July decision, consistent with the market sentiment before the policy statement. Economists are inclined to see June as the more likely commencement of the easing cycle.


The bank maintained the last paragraph of its statement, underscoring concerns about risks to the inflation outlook, especially the persistence in underlying inflation. This cautious communication implies that policymakers are not yet convinced that inflation is on a sustained path towards their two per cent target. They remain vigilant and are waiting to observe clearer progress on price pressures before considering a reduction in interest rates from their current restrictive levels.


Dawn Desjardins, Chief Economist at Deloitte Canada, noted that the central bank is resisting expectations of imminent cuts, emphasizing the need for a genuine path to achieving the two per cent inflation target.


Governor Macklem commented on recent inflation data, stating that monetary policy is largely working as expected. However, he highlighted the expectation of gradual and uneven progress on inflation, with remaining upside risks.


Despite noting some signs of easing wage pressures and lagging employment gains relative to population growth, the bank labeled the pace of economic growth as "weak and below potential," suggesting an economy in modest excess supply.


When asked about signaling the timing of rate cuts, Macklem cautioned against providing false precision and stated that the bank doesn't give forward guidance on its forward guidance.


The bank's next rate decision is scheduled for April 10, where policymakers will update economic projections based on new information regarding corporate pricing behavior and inflation expectations.


Analysts suggest that the Bank of Canada has the flexibility to wait for more progress on inflation before considering policy rate adjustments. If the economy weakens further in the first half of the year, the bank might signal a shift towards easing at the April meeting, preparing markets for a potential rate cut in June.


Recent data shows a deceleration in the yearly change in the consumer price index to 2.9 per cent at the beginning of the year, falling below the three per cent cap of the bank's target band for only the second time in 34 months. The bank reiterated that elevated shelter prices are the main contributor to inflation, with core price pressures holding in the three per cent to 3.5 per cent range.


In Macklem's press conference, he emphasized the importance of trim and median core inflation measures while highlighting the bank's attention to various price indicators, discouraging fixation on a single number.


Finally, Governor Macklem addressed concerns about the bank's quantitative tightening program, stating that it is not a root cause of recent pressures in overnight funding markets. These pressures are not indicative of an early halt to the planned balance sheet reduction.


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