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Amidst mixed economic signals that may show the beginnings of a slowdown in both inflation and the Canadian economy, the Bank of Canada elected to hold interest rates steady at 5 per cent. Earlier in the year some analysts predicted the first of the BoC’s expected interest rate cuts would come at this meeting. Somewhat stubborn inflation, however, has kept Governor Tiff Macklem from pulling the trigger today. A hold was expected in the leadup to this meeting.

“Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet. The Council is still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation,” the announcement press release reads. “Governing Council wants to see further and sustained easing in core inflation and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour. The Bank remains resolute in its commitment to restoring price stability for Canadians.”

More positive inflation data published in February has resulted in differing outlooks from economists and analysts. Some have predicted a cut to come as early as April, the next BoC meeting, especially if the CPI data to be published later this month continues to show a downward trend in inflation. Others have said cuts will come somewhat later, around June or July of this year.

In addition to CPI, both labour market and housing market data could prove instructive as advisors look to anticipate when cuts will eventually come. We have recently seen the housing market pick up steam, with an increase in both listing and buying activity in key urban markets. Some analysts have said that against this backdrop the BoC should not cut until the summer.

Jobs growth has remained somewhat muted, and negative in real terms as employment gains are outpaced by population growth. We have, however, continued to see wages rise among Canadian employees, which adds upward pressure on inflation. Macklem may need to see further softening in the labour market to prompt an interest rate cut. CPI, however, remains at the core of the Bank’s decision.

“CPI inflation eased to 2.9% in January, as goods price inflation moderated further. Shelter price inflation remains elevated and is the biggest contributor to inflation,” the announcement reads.  “Underlying inflationary pressures persist: year-over-year and three-month measures of core inflation are in the 3% to 3.5% range, and the share of CPI components growing above 3% declined but is still above the historical average. The Bank continues to expect inflation to remain close to 3% during the first half of this year before gradually easing.”

Source: Wealth Professional