“But I still haven’t found what I’m looking for” , U2

No surprise here. The Bank of Canada kept its policy rate at 5% this morning for the sixth consecutive meeting.  

Those looking for strong clues of the first cut may be disappointed. Today’s announcement showed the Bank is getting more confident that today’s elevated rates are doing the trick in bringing down inflation. But it was also more of the usual “wait and see” stance we’ve become accustomed to.   

Heading into today’s announcement, the Bank was confronted with mixed data. For the doves, annual inflation has moved below 3% and the labour market has softened (unemployment now above 6%). Excluding shelter costs, inflation is now well below 2%.   

That all sounds promising, but the caution comes from stubbornly high wage growth, still elevated inflation expectations, rising oil prices, and a better-than-expected start to the year on economic growth.  

The Bank of Canada likes what it is seeing on inflation trends. It dropped the line from the March statement that it “is still concerned about risks to the outlook for inflation”.  It replaced it with a softer “while inflation is still too high and risks remain, CPI and core inflation have eased further in recent months”.

So what’s the Bank looking for? That the downward trend in inflation is not a blip, and continues to hold:

• From the statement:  “Governing Council wants to see further and sustained easing in core inflation…”.  
  
  
• From Tiff Macklem’s press conference opening remarks: “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. The further decline we’ve seen in core inflation is very recent. We need to be assured this is not just a temporary dip.” 

The Monetary Policy Report points to a softer soft landing, with more economic growth, and a little less inflation than projected in January. The Bank is now expecting a 1.5% real GDP growth (up from 0.8% in January) and 2.6% inflation (down from 2.8% in January) in 2024. It sees inflation “passing below 2.5% in the second half of the year, before reaching 2% in 2025”.

In the meantime, many households and businesses will continue to feel the pinch. As loans come due, they will be renewed at higher rates than before. More income will go towards servicing debt, leaving less room for spending.  

The Bank is walking a fine line. It sees the need to hold the line longer to end the battle against inflation. But holding too long could inflict more economic damage than needed to get inflation back to target. 

The light is at the end of the tunnel. Now more than 2 years after the first rate hike, we believe the Bank of Canada is inching closer to its pivot to lower rates. 

Today’s announcement did little to change our view. If current inflation trends hold, we see the first cut in June, with a chance they wait until July alongside a new set of projections.

Answer to the previous trivia question: The Big Mac Index measures purchasing power parity between nations using the price of a McDonald's Big Mac as the benchmark.

Today’s trivia question: What ubiquitous condiment is thought to be the root of the word salary?