As expected, the Bank of Canada today kept its overnight rate target unchanged at 5.0 percent, while committing to maintain its existing policy of quantitative tightening. Both the media release and the opening remarks delivered by Governor Tiff Macklem were evidently crafted to give away as little as possible about the timing of any future rate cuts.
Governor Macklem began his remarks by stating that "In the six weeks since our January decision, there have been no big surprises". This is reflected in the wording of the media release. In terms of the global economy, the Bank says "Global economic growth slowed in the fourth quarter. US GDP growth also slowed but remained surprisingly robust and broad-based". As for the domestic situation, "In Canada, the economy grew in the fourth quarter by more than expected, although the pace remained weak and below potential.... Overall, the data point to an economy in modest excess supply".
The media release then moves on to the inflation picture and it is clear that he Bank does not think its inflation-busting work is done yet: "CPI inflation eased to 2.9% in January, as goods price inflation moderated further. Shelter price inflation remains elevated and is the biggest contributor to inflation. Underlying inflationary pressures persist: year-over-year and three-month measures of core inflation are in the 3% to 3.5% range.....The Bank continues to expect inflation to remain close to 3% during the first half of this year before gradually easing".
Given this assessment, the decision not to start cutting rates just yet is no surprise. The bulk of Governor Macklem's opening remarks focussed on fleshing out the Bank's logic: " the path back to our 2% target will be slow, and progress is likely to be uneven". Therefore, "It’s still too early to consider lowering the policy interest rate. Recent inflation data suggest monetary policy is working largely as expected. But future progress on inflation is expected to be gradual and uneven, and upside risks to inflation remain. Governing Council needs to see further and sustained easing in core inflation".
This leaves the timing of the start of a rate-cutting cycle completely vague, as is no doubt the Bank's intention. However, it's worth remembering that Governor Macklem has said in the past that the Bank will not necessarily wait until CPI is all the way back to the 2 percent target before deciding to start lowering rates. The question now is how long does easing inflation have to be "sustained" before a rate cut is on the cards. It is unlikely that the Bank will feel it has enough evidence by the time of its next Governing Council meeting. set for April 10; the subsequent meeting on June 5 looks much more likely to produce a rate cut.
With today's decision out of the way, attention can now urn to the next key data point: February's employment data, due for release on Friday. It is probable that the Bank had some notion of what that report contains when it made its decision today, but it was careful not to drop any hints. It is unlikely that the strong job gains seen in January will be repeated, but for now the real economy is holding up well enough to allow the Bank the luxury of time in making its policy decisions.
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