Bank of Canada holds key rate, but signals June cut in ‘realm of possibilities’

Tiff Macklem, Governor of the Bank of Canada, holds a press conference at the Bank of Canada in Ottawa on Wednesday, Jan. 24, 2024.

The Bank of Canada held its benchmark interest rate steady on Wednesday amid signs that inflation is easing, with officials acknowledging that a rate cut in June is “within the realm of possibilities.”

The central bank’s policy rate, which informs lending rates on key products like Canadian mortgages, remains at 5.0 per cent for the sixth straight decision.

The hold was widely expected by economists amid signs price pressures are easing, growth in the economy has stalled and the once-tight labour market is softening.

Bank of Canada governor Tiff Macklem said Wednesday that recent data has given the central bank more confidence that “inflation will continue to come down gradually even as economic activity strengthens.”

“Our key indicators of inflation have all moved in the right direction,” he told reporters after the rate decision.

The Bank of Canada’s rate tightening cycle began more than two years ago in an effort to rein in decades-high levels of inflation.

Annual inflation has cooled significantly since then, last coming in at 2.8 per cent in February.

The central bank signalled inflation might be cooling faster than previously expected in an updated monetary policy report released on Wednesday. While that forecast still sees inflation to return to its two per cent target in 2025, it now calls for inflation to cool to 2.2 per cent by the end of 2024, down from previous expectations for 2.4 per cent.

The Bank of Canada’s preferred metrics of core inflation have also begun to ease lately, hovering above three per cent in February.

The central bank acknowledged this progress in its statement accompanying the rate decision on Wednesday, but said it was still looking for evidence that “downward momentum is sustained.”

CIBC senior economist Andrew Grantham said in a note to clients Wednesday that this marks a shift in tone from the Bank of Canada, with monetary policymakers no longer flagging the “persistence” of core inflation in their remarks.

Shelter price inflation also remains “very elevated,” the Bank noted, thanks to rising rents and mortgage costs. Food price inflation is expected to continue to cool thanks to global price declines in the agricultural sector, according to the MPR.

Monetary policymakers will continue to watch the evolution of inflation expectations, corporate pricing behaviour and wage growth as it decides where to take its benchmark interest rate next.

The central bank noted that recent easing in the labour market suggests wage pressures are “moderating.” The Bank’s MPR said it expected further progress in inflation expectations and normalized pricing in the months ahead.

But rising home prices tied to strong demand in the housing market and outstanding geopolitical risks still threaten to push inflation higher in the months ahead, the report warned.

Carolyn Rogers, senior deputy governor at the Bank of Canada, told reporters Wednesday that the Bank does expect “some pickup” in home values this year, but a rally that sees prices accelerate past the central bank’s forecasts could put “pressure” on inflation.

“It’s one of the risks. It’s not the only one,” she said.

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In a press conference following the rate hold on Wednesday, Macklem was asked whether an interest rate cut in June was on the table.

“Yes, it’s within the realm of possibilities,” he said.

That marks a departure from the Bank of Canada’s recent messaging. Speaking after the central bank’s March decision, Macklem made clear it was “too early” to cut interest rates until the central bank saw more easing in core inflation.

Tu Nguyen, economist with RSM Canada, told Global News on Wednesday that the Bank of Canada’s statements on Wednesday were “more dovish” – implying that less restrictive monetary policy could be on the way.

“The Bank has definitely changed its stance,” she said. “Even though the rate was held at five per cent, I think the focus now has shifted … and the door is open for rate cuts.”

Macklem also told reporters that the Bank of Canada’s governing council discussed when it would be appropriate to lower its policy rate. While he said there was some “diversity of views” among the council, there was a “consensus” to hold the policy rate at 5.0 per cent on Wednesday.

Macklem said that while the Bank of Canada is “encouraged” by its progress to date, policymakers need to be certain the recent easing in core inflation is not a “temporary dip.”

“What do we need to see to be convinced it’s time to cut? The short answer is 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,” he said in his opening remarks.

Grantham said the Bank of Canada’s statement Wednesday showed little rush towards eventual interest rate cuts. If core inflation continues to ease in Statistics Canada’s next two consumer price index reports, interest rate cuts could start at the central bank’s next decision on June 5, he said.

“Overall, the statement is in line with a central bank moving slowly towards lowering interest rates,” Grantham said.

Nguyen noted that the Bank of Canada will not commit to a specific rate cut timeline in case upcoming data diverges from the current forecast, but she said a June rate cut is “very likely.” Waiting longer than that to ease monetary policy could put Canada behind other nations when it comes to an expected economic recovery in the second half of 2024, she argued.

“The moment the rate cuts begin, that is a signal for businesses to begin investing and hiring again. And we don’t want Canadian businesses to to fall behind compared to global peers,” Nguyen said.

– with files from Global News’ Anne Gaviola