Despite the decline in inflation and the rise in the unemployment rate, the time has not yet come to let our guard down, according to the Bank of Canada, which is maintaining its key rate at 5%.
The central bank wants to ensure that inflation does not resurface, Governor Tiff Macklem explained in his message on Wednesday. “What will it take to convince us it’s time to cut the rate?” To summarize, the data is what we want to see, but we want to see the movement continue to be sure that progress toward price stability will last. »
“The new decline in core inflation is very recent,” he said. We want to make sure this isn’t just a temporary drop. »
Most observers expected the key rate to be maintained at its current level and forecast a first cut in June or July.
In response to a question asked at a press conference, the governor indicated that a rate cut in June was “a possibility.”
Central bank leaders have already indicated that they will not wait until inflation has returned to the 2% target before initiating rate cuts.
“The press release does not explicitly say that rate reductions are on the table, but that is the message that is conveyed,” interpreted the economists at the National Bank.
The Bank of Canada is getting closer to a rate cut, notes Nathan Janzen, economist at the Royal Bank, who forecasts an initial cut of 25 basis points in June.
At Desjardins, Randall Bartlett, senior director, Canadian economy, also believes that the next announcement from the Bank of Canada, on June 5, will be a rate cut.
Until then, the monetary authorities will have two other readings of the Consumer Price Index and another health report on the labor market to get their teeth into before deciding whether the long-awaited moment for Canadian households has finally come. arrived.
The Minister of Finance of Quebec, Eric Girard, is also starting to believe in an imminent reduction in the key rate. “What the Bank wants, basically, is confirmation that what has started, the decline in inflation, continues, and there will be two other statistics on inflation between now and the next meeting. So if the trend that has started continues, it is very likely that we will have rate cuts,” he said when interviewed after Wednesday’s announcement.
Forecasts revised upwards
In its Monetary Policy Report, published at the same time as the decision on the key rate, the Bank of Canada notes that the Canadian economy is performing better than it had expected. It is therefore revising its growth forecast upwards. The economy is supported by population growth, government spending and the strength of the U.S. economy, the report said.
The central bank forecasts growth of 1.5% this year and 2% next year.
On the inflation front, progress will be slow, predicts the central bank. The overall inflation rate fell for two consecutive months, reaching 2.8% in February. Most of the indicators that monetary authorities follow are moving in the right direction, the governor said. “Core inflation over three months, which paints a more current picture, fell below 3% in February, which suggests some downward movement,” he notes.
The overall inflation rate measured by the Consumer Price Index will remain around 3% over the coming months, due to the increase in the price of gasoline. It will be necessary to wait until 2025 for inflation to return to the 2% target, according to the Bank of Canada.
High housing prices and wage increases continue to worry the central bank because they could fuel inflation.