Notes From the Desk: BoC Day – Dropping Some Hints.
As expected, the Bank of Canada (BoC) held its target overnight rate at 5% and continued the process of quantitative tightening.
But as is often the case with these meetings, the devil is in the details, and they did drop some hints that rate cuts could be coming later this year.
Key observations.
- Higher rates are restraining the economy, leading to lower price pressures.
- The number of CPI components rising faster than 3% has substantially declined and should continue to normalize.
- Shelter costs rising 7%, and food prices increasing 5% continue to be sore points.
- CPI is expected to remain at 3% until mid-year before falling to 2.5% at the end of 2024, reaching 2% in 2025.
- Growth is expected to be weak for several more months before rebounding to 2.5% in the second half of the year.
The Hint.
Governor Macklem acknowledged that the Governing Council is comfortable that rates are high enough to lower inflation, and so the discussion has shifted to how long rates need to stay at 5%.
This is a subtle shift but does suggest that the BoC believes that inflation will cool enough to allow for rate cuts this year. Furthermore, their expectation for growth to pick up in the second half of 2024 could be tied to these cuts being delivered.
Market reaction.
The bond market went into the meeting expecting 100 bps of rate cuts this year. Today’s hints were enough to push yields 3-4 bps lower.
