Bank of Canada: we're getting there

As expected, the Bank of Canada kept its overnight rate target unchanged at 5.0 percent today. The media release was rather longer than usual, reflecting the fact that the Bank also issued an updated Monetary Policy Report. Based on the media release and Governor Macklem's subsequent comments, most analysts believe that a rate cut in June is still probable, but the latest inflation developments in the US may yet delay things. 

Key quotes from the media release include:

• The Bank has revised up its forecast for global GDP growth to 2¾% in 2024 and about 3% in 2025 and 2026. Inflation continues to slow across most advanced economies, although progress will likely be bumpy. Inflation rates are projected to reach central bank targets in 2025. 
• In Canada, economic growth stalled in the second half of last year and the economy moved into excess supply.....the unemployment rate has risen gradually, reaching 6.1% in March. There are some recent signs that wage pressures are moderating.
• Economic growth is forecast to pick up in 2024. This largely reflects both strong population growth and a recovery in spending by households.......Overall, the Bank forecasts GDP growth of 1.5% in 2024, 2.2% in 2025, and 1.9% in 2026. The strengthening economy will gradually absorb excess supply through 2025 and into 2026.
• CPI inflation slowed to 2.8% in February.....However, shelter price inflation is still very elevated, driven by growth in rent and mortgage interest costs. Core measures of inflation....slowed to just over 3% in February, and 3-month annualized rates are suggesting downward momentum. The Bank expects CPI inflation to be close to 3% during the first half of this year, move below 2½% in the second half, and reach the 2% inflation target in 2025.

All in all, this sounds very much like the soft landing that the Bank and its peers around the world have been striving to achieve.  Even so, the Bank is not quite ready to commit to a rate-cutting cycle just yet. As the media release puts it, and as Governor Macklem repeated in his comments after the rate announcement, "While inflation is still too high and risks remain, CPI and core inflation have eased further in recent months. The Council will be looking for evidence that this downward momentum is sustained".  Analysts' interpretation of this is generally that the Bank just needs to see "more of the same" before it starts cutting rates. It will have two more months of CPI and employment data to hand by the next rate announcement date on June 5, and that data will be crucial to its decision.

The importance of ensuring that progress against inflation is "sustained" is underscored by the US CPI data for March, released just ahead of the Bank of Canada's announcement this morning. Headline CPI jumped to 3.5 percent year-on-year from February's 3.2 percent reading, driven by shelter and gasoline costs, while core CPI stands at 3.8 percent year-on-year.  The data drove US markets sharply lower and led many analysts to all but rule out any possibility of a Fed rate cut in June.

There is no direct link between US and Canadian inflation, but gasoline and shelter costs are a big part of the index in both countries. A similar nasty shock in Canada's CPI in the next month or two, most likely due to gasoline prices, cannot be ruled out.  There is no doubt that the Bank of Canada would like to get started on an easing cycle, with the Canadian economy notably underperforming the US in recent months, but the data could yet derail expectations for a June rate cut.