The Bank of Canada maintained its overnight rate at 5 per cent this morning. In the statement accompanying the decision, the Bank noted that while the Canadian economy appears to have entered into a phase of excess supply, it expects growth in the Canadian economy to pick up this year and next. On inflation, the Bank cited that inflation is still too high and risks remain, and that shelter inflation is still very elevated. However, both CPI and core inflation have eased in recent months and 3-month annualized measures suggest downward momentum. The Bank will continue to look for evidence that this downward momentum is sustained.

There is now a widely held belief in financial markets that today's rate hold by the Bank of Canada will be its last before embarking on a series of rate cuts starting in June. There is also mounting evidence that this is the correct course of action. Jobs data from March showed that the Canadian unemployment rate reached its highest level in three years and inflation is well below target once housing costs are removed. Given that housing costs are rising as a function of the Bank's tight monetary policy and its effects on mortgage rates and new home supply, it would be wise for the Bank to look past rising shelter inflation when setting the future course of monetary policy. We expect that the Bank will lower rates 3 to 4 times this year in 25 bps increments with 2.5 per cent as the ultimate destination for the overnight rate by the end of 2025.

Posted by Adam Chahl on
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