Bank of Canada held rate at 5%

The Bank of Canada has maintained its policy rate at five percent, signaling a shift in focus from whether monetary policy is restrictive to how long the current stance will be maintained. The decision, widely expected, comes as officials observe a stalled economic growth that is anticipated to remain slow in the near term, aiming to bring inflation back to the bank’s two percent target next year.

Governor Tiff Macklem emphasized a consensus to maintain the policy rate, revealing a shift in discussions toward the duration of the current restrictive stance. The dovish tone suggests a rapidly slowing economy, potentially paving the way for rate cuts in the coming months.

The Canadian dollar reacted with a decline, and the benchmark two-year note saw a decrease in yield. The governor highlighted the need to balance risks and expressed concerns about underlying price pressures, though the bank removed language indicating readiness for further rate hikes.

Officials seek sustained easing in core inflation, focusing on the balance between demand and supply, inflation expectations, wage growth, and corporate pricing activity. Despite trimming the economic growth projection to 0.8 percent for the year, the Bank of Canada maintains a base case of a soft landing, anticipating growth to pick up around the middle of the year.

Inflation is expected to hover around three percent in the first half of 2024, declining to approximately 2.5 percent by year-end, and returning to the bank’s two percent target next year. The economy's current "modest excess supply" condition is anticipated to impact prices, with shelter price inflation expected to remain elevated.

Wage growth, currently at a four to five percent yearly pace, is projected to slow, aligning with inflation and modest productivity growth. Shelter price inflation, particularly mortgage interest costs, is expected to slow gradually as financial conditions ease, while rental price inflation is forecast to moderate due to a slowdown in population growth and an increase in new housing construction.

A potential rise in house prices is identified as a risk that could drive inflation higher than expected. Canada’s economy, with higher debt loads and shorter-duration mortgages, is viewed as rate-sensitive. Most economists anticipate a Bank of Canada policy rate cut by June, aligning with expectations in overnight swaps. This information holds significance for the real estate sector, influencing factors such as mortgage costs, housing demand, and overall market conditions.

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