EconoFACTS

March 06, 2024 | 10:26

BoC Monetary Policy Announcement—Not Ready to Back Off Yet

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 policy rates at 5%, as expected. The tone of the policy statement and press conference opening statement was balanced, but not as dovish as the market was anticipating, with the Canadian dollar rallying in the immediate aftermath.

Inflation remains the key for policymakers who clearly aren't comfortable yet. The statement highlighted that "underlying inflation pressures persist" and core inflation remains in the 3%-to-3.5% range. In addition, the share of components above 3% is above the historical average, despite trending lower. "The Bank continues to expect inflation to remain close to 3% during the first half of this year before gradually easing." If inflation evolves as expected, that suggests we could see a mid-year start to cuts. At this point, the BoC looks comfortable holding rates steady through the Spring, as there's still a fair amount of wood to chop on inflation.

On the economy, Q4's better-than-expected GDP growth was noted, but "the pace remains weak and below potential". Anticipated ongoing softness in growth, and the economy operating "in modest excess supply" is expected to help drive disinflationary pressure and open the door to easing later this year. Also, moderating employment growth was cited, as "the labour market has come into better balance". One small win for the doves out there is that wage pressures "may be easing"...hardly definitive, but it's the right direction.

The last paragraph was almost a carbon copy from the January statement, suggesting a very high bar for an April move. This quote from the press conference opening statement sums it up well: "We’ve come a long way in our fight against high inflation. Monetary policy is working—inflation is coming down. But it’s too early to loosen the restrictive policy that has gotten us this far."

Key Takeaway: There's been good progress on inflation, but with core CPI still rising at an above-3% pace, the Bank remains concerned about upside risks. BMO continues to look for a June start to cuts, and there's nothing in today's statement to change that view.