Bank of Canada holds key interest rate at 5%, says things moving in right direction

The Bank of Canada has held its key interest rate at five per cent for the sixth consecutive time since July, saying it will look for signs that slowing inflation is sustained before moving on rate cuts.

The central bank said that inflation is still too high, but noted that core inflation measures - which strip out volatile sectors like food and energy - have trended down‐ ward in recent months.

"I realize that what most Canadians want to know is when we will lower our policy interest rate. What do we need to see to be convinced it's time to cut?" Bank of Canada governor Tiff Mack‐ lem said during a news con‐ ference following the an‐ nouncement.

"The short answer is we are seeing what we need to see, but we need to see it for longer to be confident that progress toward price stabil‐ ity will be sustained. The fur‐ ther decline we've seen in core inflation is very recent. We need to be assured this is not just a temporary dip."

Macklem said that a rate cut in June is "within the re‐ alm of possibilities."

WATCH | Tiff Macklem doesn't rule out June rate cut:

While inflation cooled to 2.8 per cent in February, with price growth slowing across goods, food, clothing and services, high rent and mort‐ gage interest costs continue to drive up the overall infla‐ tion rate.

The bank expects inflation will move closer to its two per cent target this year, and that it will reach it in 2025. The bank also expects solid

GDP growth this year and in 2025, due to population growth and increased house‐ hold spending.

"As we consider how much longer to hold the policy rate at the current lev‐ el, we're looking for evidence that the recent further easing in underlying inflation will be sustained," Macklem said.

The Bank of Canada first raised interest rates in March 2022, the beginning of an ag‐ gressive campaign to cool in‐ flation that resulted in 10 rate hikes in less than two years.

Bank just needs to see 'more of the same': economist

"It seems like the Bank of Canada is telling Canadians that rate cuts are on the hori‐ zon and it might not be so long before they become a reality," said economist Royce Mendes, managing director at Desjardins Capital Mar‐ kets.

He said that the longer the bank holds interest rates at five per cent, the more it risks tipping the economy in‐ to an unnecessary recession.

Mendes added that he thinks the central bank will start cutting rates at its next meeting on June 5, and that it will continue to cut in small increments at subsequent meetings from then on.

WATCH | Earlier this year, Macklem explains why core inflation is so important:

"All they needed to see for rate cuts to become a reality was more of the same, which is really great news," Mendes said.

Economists have forecast that the Bank of Canada will lead the U.S. Federal Reserve in rate cuts as economic data in both countries have been diverging.

"The U.S. economy right now is extremely strong, whereas the Canadian economy is struggling," Mendes said.

The U.S. economy grew at a faster pace than expected in the fourth quarter, while January GDP data shows that the Canadian economy be‐ gan 2024 on a stronger note after last year's weak activity.

U.S. inflation increased more than expected in March by 0.4 per cent after advanc‐ ing by the same amount in February, pushing hopes of a Fed rate cut further into the second half of the year.

Macklem said he did not see a big impact from U.S. in‐ flation on Canada.