EconoFACTS

April 10, 2024 | 10:37

BoC Rate Decision & MPR — Holding Pattern

Economist

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal nearly two decades. He is re-sponsible for the Canadian macro-econom... (Read more)

Benjamin Reitzes

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal nearly two decades. He is re-sponsible for the Canadian macro-econom... (Read more)

The Bank of Canada held rates steady at 5%, as expected, for the sixth consecutive meeting. The tone of the policy statement was mildly more dovish, acknowledging the slowing in underlying inflation and loosening labour market. However, the growth forecast was resilient, and the Bank reinforces that "inflation is still too high and risks remain." More progress is needed before rate cuts can begin.

The economic backdrop improved broadly, with an upgrade to global GDP growth forecasts for 2024 (+2.8% from 2.5%) and 2025 (+3% from +2.7%)—both now about in-line with BMO's call. The Canadian growth forecast was upgraded substantially with 2024 up to 1.5% (from +0.8% previously). The 2025 growth projection was trimmed a couple of ticks, but is still solid at 2.2%. The near-term forecast was upgraded as well, with Q1 GDP growth lifted to 2.8% a.r. (from 0.5%) and Q2 introduced at 1.5%. Both were about as expected, though Q2 is at the high end of the range. The broadly firmer growth forecast comes in contrast to dovish language around inflation and the labour market.

CPI forecasts were trimmed with Q1 0.4 ppts lower to 2.8% y/y thanks to the better readings in January and February. However, no further progress is expected in the first half of the year, with Q2's forecast at 2.9% before heading lower to 2.2% by year end, two ticks lower than previously.

On the labour market, the Bank notes the rising jobless rate and that job growth isn't keeping up with the expansion in the labour force. The statement then highlights that "There are some recent signs that wage pressures are moderating." Also a dovish tidbit.

The statement's inflation paragraph was broadly encouraging, though shelter remains an issue. Slowing inflation is "becoming more broad-based across goods and services" and 3-month annualized metrics point to further slowing. Despite the generally upbeat language, the Bank wants more from core CPI: "The Council will be looking for evidence that this downward momentum is sustained."

The final paragraph saw a few changes, but the main point is that policymakers still need to see more progress on inflation before they're willing to ease.

A few additional points of interest from the MPR:

The neutral rate range was lifted 25 bps to 2.25-3.25%, as expected.
Potential growth was raised for 2024 due to strong population growth, and cut in 2025 and 2026 with population gains expected to slow.

Finally, with this morning's strong U.S. CPI, the BoC is going to have to keep a close eye on USDCAD. There's a limit to how far the BoC and Fed can diverge and the C$ will be a big determinant of that. The last thing the BoC wants is to cut too aggressively, have the loonie tank, and spark imported inflation.

Key Takeaway: The Bank of Canada was mildly more dovish noting the encouraging core inflation trend and softening labour market. However, policymakers need more evidence that this trend will continue before they're willing to start easing. While June is still on the table, the coming CPI reports will need to be at least as good as what we saw in January and February. With the Fed seemingly on hold for potentially longer after a string of firm CPIs, the BoC will likely be a bit more cautious on the margin with rate cut timing.