MNI BOC WATCH: Rate Held, Pause Phrase Gone, Hike Talk Stays

The Bank of Canada dropped language about likely being done with interest-rate hikes while keeping a phrase about a potential increase to address inflation now seen above target longer than expected, putting it more back in line with Fed and ECB hawks and widening a divergence with investors predicting a rate cut later this year.

Governor Tiff Macklem left the overnight rate target at 4.5% Wednesday, the second pause after eight prior hikes, a decision predicted by all economists surveyed by MNI. Most of those economists though had predicted the Bank would keep its earlier commitment to a likely extended pause with inflation slowing in recent months.

"Governing Council continues to assess whether monetary policy is sufficiently restrictive to relieve price pressures and remains prepared to raise the policy rate further if needed to return inflation to the 2% target," Macklem and his Governing Council deputies said in a statement. The Governor has an 11am EST press conference. 

"Recent data is reinforcing Governing Council’s confidence that inflation will continue to decline in the next few months. However, getting inflation the rest of the way back to 2% could prove to be more difficult because inflation expectations are coming down slowly, service price inflation and wage growth remain elevated, and corporate pricing behaviour has yet to normalize," Bank officials said.

The Bank's new forecast showed inflation still slowing from today's 5.2% to 3% by midyear, while remaining above 2% until the end of next year instead of a January forecast for sometime in 2024.

The Bank sets interest rates to keep inflation in the middle of a 1%-3% band and return to target within two years, and price gains have already topped 2% since March of 2021. Canada’s policy rate remains also negative versus the current rate of CPI and some of its own measures of inflation expectations. 

Canada signaled a potential move to the sidelines in January as Fed and ECB officials cranked up rhetoric about the need for more hikes to subdue inflation, which central bankers during the upswing argued was a global and not a local phenomenon.

Earlier this year BOC officials also argued Canada could plot its own course on rates because local price gains were about the lowest across major economies. On Wednesday the Bank said inflation will remain "well above central bank targets" by the end of this year.

Investors recently haven't been so resolute about a long pause in Canada, betting on a cut in the next few months. Some economists had said the more likely case was a cut towards year-end.

The Bank's eighth straight tightening through January was the longest series since moving to fixed meeting dates in 2000 and the benchmark is the highest since 2007. Policymakers had argued the full drag of that tightening would hit the economy this year and take it to the brink of recession. The Bank's new forecast shows growth of 1.4% this year instead of the prior 1% and first-quarter growth at an annualized 2.3% pace instead of 0.5%. Growth will average less than 1% over the rest of the year, the Bank said.

While inflation risks are "roughly balanced" upside ones are of greater concern given inflation is so high, the Bank concluded in its Monetary Policy Report. Inflation will be 3.5% this year, 2.3% in 2024 and its first estimate for 2025 came in at 2.1%. 

Canada's economy will be overheated through the first half of the year, though the collapse of SVB poses a risk and slower U.S. growth will cool Canada's exports, the Bank said. Another potential source of inflation relief could come from population growth boosting labor supply. 

The overall picture is still one where core inflation around 5% and wage growth following close behind aren't consistent with restoring inflation to target, the Bank said. "The Bank remains resolute in its commitment to restoring price stability for Canadians."