- The market was calculating a 15% chance of a rate cut
- The Bank of Canada “remains concerned about risks to inflation expectations, particularly persistent core inflation.”
- The Bank of Canada statement no longer says it “remains prepared to raise interest rates further if necessary.”
- The Canadian economy has faltered since mid-2023, and growth is likely to remain near zero through the first quarter of 2024.
- Economic growth is expected to gradually strengthen in mid-2024
- The Bank of Canada expects GDP to grow by 0.8% in 2024
- The Bank of Canada expects inflation to remain close to 3% during the first half of this year before gradually declining, returning to the 2% target in 2025.
- Core measures of inflation do not show a sustained decline
- Consumers have withdrawn their spending in response to rising prices and interest rates
- The economy now appears to be operating under a modest surplus in supply
- Labor market conditions have improved, with job openings returning to near pre-pandemic levels, and new jobs are being created at a slower rate than population growth.
- Growth in the United States was stronger than expected, but is expected to slow in 2024
- Inflation rates in most advanced economies are expected to decline slowly, reaching central banks’ targets in 2020
- Expectations for inflation of 2.8% this year are lower than 3.0% in October
- There was a clear consensus to keep the interest rate at 5%.
- We try to balance the risks of over tightening and under tightening
- We need to see further easing of core inflation
USD/CAD rose on the statement because it removed the line about being prepared to raise interest rates if necessary. But Macklem said in the opening statement of the press conference (which was published with the release as a protocol opportunity):
This does not mean that we have ruled out further interest rate increases. If new developments lead to higher inflation, we may still need to raise interest rates. But what it does mean is that if the economy develops broadly in line with the forecasts we published today, I expect future discussions will revolve around how long we will keep interest rates at 5%.
The market still views this as pessimistic and I agree with that view. The CPI report coming out of Canada will be big and I expect it will show the decline in core inflation that the Bank of Canada wants to see, which would mean the first cut in March or April, although the market is not putting much weight on the March cut (only 7%) .
The Bank of Canada will hold a press conference at 10:30 a.m. ET.