Today, the Bank of Canada held the overnight rate at 5% for the sixth consecutive meeting and pledged to continue normalizing its balance sheet. Governor Macklem confirmed that inflation is moving in the right direction, labour markets are easing, and wage pressures appear to be dissipating. In today's release of the April Monetary Policy Report (MPR), the central bank forecasters lowered their 2024 inflation forecast to 2.6% from 2.8%. However, the Governing Council needs more evidence to be confident that the downtrend in inflation is sustainable.
In contrast, the US CPI data released today for March showed that underlying inflation topped forecasts for the third consecutive month, and the US jobs data also beat estimates. This is in direct contrast to the news of better-than-expected inflation in Canada and the easing of labour markets. The Canadian economy is far more interest-rate sensitive than the US because mortgage terms are far shorter. Over 60% of all outstanding mortgages are up for renewal in the next two to three years, adding to monthly mortgage payments. That process has already begun.
While the Canadian economy slowed at the end of last year, more recent data suggest a bounce back in the first quarter. The Bank revised up its forecast for GDP growth in the first half of 2024 but reduced its economic outlook for next year. The Bank expects inflation to hit its 2% inflation target in 2025.
Bottom Line
Governor Macklem's prepared opening statement at today's press conference was more dovish on inflation than in prior months. “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,” Macklem said in the prepared text. If things go according to today's MPR forecasts, policymakers are likely to begin cutting the overnight rate in June.
Still, Macklem called further declines in core inflation “very recent,” adding that the bank wants to “be assured this is not just a temporary dip.”
“While inflation is still too high and risks remain, CPI and core inflation have eased further in recent months,” officials said in the policy statement. The next decision date is June 5, when overnight swaps traders pared their bets to about a 50-50 chance of a 25 basis point cut at that meeting, down from over two-thirds before today's data release. A July rate cut is fully priced in.
We will know more this coming Tuesday when the March CPI data (along with the federal budget) are released. April CPI will be posted on May 21. As the chart below shows, inflation data in Canada is rapidly approaching the 2% target, well ahead of the US, although set backs can't be ruled out. For example, gasoline prices have risen since early February. However, the proportion of CPI sectors showing less than 1% gains is rising as those showing more than 3% increases are falling fast.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
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