June cut possible, BoC head says

Bank of Canada holds key lending rate at 5%, says economic indicators showing good progress

The Bank of Canada kept its key overnight lending rate untouched at five per cent, but left the door open for cuts in June, saying it believes inflation will continue to slow.

Governor Tiff Macklem said in a news conference Wednesday that a June cut is “within the realm of possibilities,” adding that central bankers have been encouraged by the progress of several main economic indicators since January.

“We are seeing what we hoped and need to see. We just need to see it for longer to be confident that we are clearly on a path to two per cent inflation,” he said.

Economists are forecasting a 25basis-point reduction in June, when the next rate announcement is expected, which would bring the policy rate down to 4.75 per cent — the same level as in June 2023.

“Governor Tiff Macklem sounded relatively dovish in the Bank of Canada’s press conference today,” Stephen Brown, deputy chief North America economist at Capital Economics, said in a note to clients.

“The bank no longer needs to see a further easing of core inflation, as it said in January, only evidence that the ‘downward momentum is sustained,’ ” Brown added.

The bank also released its monetary policy report on Wednesday, raising the forecast for Canadian GDP growth in 2024, as Canada is expected to welcome more nonpermanent residents this year. It also lowered its estimate for CPI inflation by 0.2 percentage points in 2024 following recent inflation reports.

Inflation in February unexpectedly fell to 2.8 per cent with widespread evidence of relief across major categories. The bank is expecting inflation to fall below 2.5 per cent in the second half of the year and reach the two per cent target in 2025.

Expectations of inflation are normalizing among businesses and forecasters, but not among consumers, according to April’s monetary policy report.

The labour market also seems to be cooling. The unemployment rate jumped to 6.1 per cent in March and the central bank says it is seeing signs of wages stabilizing.

But shelter inflation remains a risk to overall inflation, the bank said. In February, mortgage interest cost was the main contributor to CPI, rising by 26.3 per cent from a year earlier.

“We know that our policy actions directly affect mortgage interest costs,” Macklem said on Wednesday, adding that “that is something we can control for as we think about our monetary policy response.”

He emphasized the bank’s focus on seeing improvements to core inflation, a measure that looks through mortgage interest costs while accounting for other housing costs such as rent.

The latest increase in U.S. inflation also casts doubt on the central bank’s next move, said Andrew DiCapua, senior economist at the Canadian Chamber of Commerce.

U.S. inflation rose to 3.5 per cent in March, according to data from the Bureau of Labor Statistics released on Wednesday.

“At their June meeting, they’ll have over three months of inflation data, aided by survey results trending in the right direction,” DiCapua said.

“The Bank of Canada is poised to act ahead of the (U.S.) Federal Reserve, signalling a greater divergence between the two economies.”