Bank of Canada keeps key interest rate at 5% for fifth consecutive time. Here’s what’s next

12:45 p.m

What’s next?

• The Bank of Canada’s next interest rate decision is on April 10. The bank will also publish updated inflation and economic growth forecasts in its quarterly Monetary Policy Report.
• Statistics Canada will publish February inflation data on March 19. The latest labour force survey data is out this Friday, March 8, while January GDP numbers will be published on March 28.
• The U.S. Federal Reserve’s next interest rate decision is on March 20. It is widely expected to keep the Federal Funds Rate steady in the 5.25 to 5.5 per cent range.

– Mark Rendell

12:25 p.m

Macklem says timeline for quantitative tightening unchanged, despite market speculation of early end

Open this photo in gallery:

Bank of Canada Governor Tiff Macklem said the central bank’s approach to quantitative tightening has not changed, despite signs of pressure in short-term funding markets earlier in the year, which prompted speculation that the bank could stop shrinking its balance sheet in the coming months.

“We don’t think QT was the root cause of these overnight pressures. And you shouldn’t take this tightness that we saw in January as a suggestion, or as a sign that QT is likely to end earlier than we previously expected,” Mr. Macklem said in the press conference.

Over the past two years, the bank has been shrinking the size of its balance sheet, which ballooned during the earlier phases of the COVID-19 pandemic when it purchased hundreds of billions worth of government bonds to try to stimulate the economy.

This normalization process, QT, involves letting the bonds the central bank owns mature without replacing them. This pulls money out of the financial system and reinforces the bank’s high interest rates.

Bank officials had previously said they expected to end QT in late 2024 or early 2025, at which point they would begin buying bonds again to stabilize their assets and the amount of central bank reserves in the financial system.

However, questions emerged in recent months about whether the bank might end QT earlier, after interest rates in overnight lending markets, known as repo markets, began moving away from the bank’s target – a potential sign that demand for cash was exceeding supply.

In January, the bank had to intervene directly in these markets, pumping cash into the financial system on a short-term basis to try to nudge overnight interest rates back to target.

“We did those overnight operations 13 times in January. We haven’t done any since January. And that really reflects the fact that that pressure has gone away,” Mr. Macklem said.

Senior deputy governor Carolyn Rogers said that the upward pressure on repo rates was more likely the result of unusual demand for bonds than a sign that QT had gone too far and there wasn’t enough liquidity in the financial system.

“A lot of participants were purchasing those long bonds on leverage. So the demand for funding was up sharply for a stretch of time. So as the Governor said, it’s not our read that that has a lot to do with our QT strategy,” she said.

“So far QT has gone very smoothly,” she added. “Our balance sheet is about 40 per cent smaller than it was when we started QT. So we expect to continue as we planned … . If our strategy is going to change, we’ll definitely give advance notice to that.”

Deputy governor Toni Gravelle is scheduled to give a speech on the bank’s balance sheet on March 21.

– Mark Rendell

12:05 p.m

Opinion: The case for an April interest-rate cut by Tiff Macklem

Headline (year-over-year) inflation in January moved back into the Bank of Canada’s one-to-three per cent target range. Yet on Wednesday, the Bank of Canada again held its target for the overnight rate at 5 per cent.

Why is the bank reluctant to cut? There are two main impediments: core inflation, and concerns over expectations. Both are fair…but both are easing or should ease soon. An April rate cut may therefore be in the cards.

The bank’s mandate is to target 2 per cent headline inflation. But headline inflation contains a number of volatile items, e.g., energy, and so to get at underlying price pressures, many central banks have measures of core inflation that strip away these components. The bank’s preferred core measures are CPI-trim (excluding the most volatile items) and CPI-median (focusing on the price change at the 50th per centile).

Both indicators have been sticky throughout this tightening campaign and remain above the target range at 3.4 and 3.3 per cent respectively. It is reasonable that the bank would like more clarity that those underlying price pressures are easing.

Read the full column on today’s interest-rate’s decision.

– contributors Jeremy Kronick and Steve Ambler

11:30 a.m

Economists react to the latest Bank of Canada decision

Here’s how economists are reacting to Wednesday’s BoC hold:

James Orlando, Director & Senior Economist, TD Economics

The song remains the same. The BoC came out today to reinforce its view that more time is needed to make sure that inflation is headed to the 2 per cent target. We get it. With core rates of inflation tracking around the mid-3 per cent level, the Bank can justify waiting longer. Luckily the central bank has been gifted a little more time to wait. Economic growth eked out small, but positive, growth to end 2023. With effectively no pressure for the BoC to respond, it can sit back and wait for a couple more inflation reports to roll in.

Markets don’t think the BoC can get too comfortable. A June cut is nearly 90 per cent priced, and we agree with that timing. In spite of the economy having avoided recession, consumers are feeling the pain of higher rates. Spending per capita has contracted over the better part of the last 18 months. And it is not as if rate hikes aren’t impacting inflation. Sure, the BoC’s core measures are still elevated, but they are being driven by shelter prices. Indeed, inflation excluding shelter is running below the BoC’s 2 per cent target, at only 1.6 per cent year-on-year. While the BoC isn’t ready to adjust course just yet, we think that the time for rate cuts is quickly approaching.

Royce Mendes, Managing Director and Head of Macro Strategy, Desjardins Securities

Canadian central bankers held rates steady, but have seemingly all but ruled out further rate increases. While policymakers say it’s still too early to consider lowering rates, Governor Macklem acknowledged that policy is working as expected. The economy remains weak and inflation has eased further since the January rate decision. In the communications released today, officials marked lower their assessments of both core inflation and wage growth, implicitly taking some greater comfort in the evolution of both.

Nevertheless, Governing Council is still concerned about the stickiness in underlying inflation and wants to see more cooling in price pressures before waving the white flag. Officials seem like they were only willing to take a half step towards a more balanced approach to monetary policy today. Notably Macklem insisted in his opening statement for the press conference at 10:30am that the central bank will remain focused on the indicators of inflation that officials have mentioned before. In other words, they’re going to keep using the flawed CPI-Trim and CPI-Median measures of core inflation to make policy decisions, which are biased higher at the moment.

Overall, the Bank of Canada wasn’t ready to make a significant change in its message that it’s too early to begin cutting interest rates. However, the rate announcement and opening statement to Macklem’s press conference do acknowledge that the conditions for rate cuts are coming into clearer sight. A significant change in tone will likely occur at the April rate announcement, with cuts beginning in June of this year.

Ashish Utarid, Assistant Vice-President of Investment Strategy with IG Wealth Management

Although we expect a rate cut in the near future, recent GDP figures and job market data suggest the Canadian economy is still holding up enough in the eyes of the BoC. Digging into the GDP report, its net exports, especially from the energy sector, and not internal consumer demand, that were the key contributors to fourth-quarter growth. This helped the economy steer clear of a technical recession and supported the Bank’s decision to maintain the current rate, but under the hood there is evidence that the Canadian consumer is struggling.

There are clear signs the economy has shown signs of a slowdown since mid-last year. The Bank is currently proceeding with caution, struggling with the core inflation levels, which removes more volatile food and energy metrics. The Consumer Price Index (CPI) stands at 2.9 per cent year-over-year, but when mortgage interest costs are excluded, the CPI falls to 1.6 per cent YoY, shelter costs being a large contributor.

The bank is also likely waiting to see what steps the U.S. Federal Reserve will take. But the need for a rate cut is becoming more evident as the economy struggles to gain momentum.

These conditions make a strong case for a reduction in interest rates and the probability is growing that the Bank of Canada will move to loosen monetary policy by mid-year. Such a move would be aimed at reducing the financial strain on consumers, particularly those dealing with mortgages and rent, and help kickstart economic growth in the latter half of 2024. If the Bank doesn’t adjust rates by April, it’s looking more likely that a cut could happen by June.”

Bryan Yu, Chief Economist, Central 1

As expected, the bank continued to preach patience on rate cuts citing persistence in underlying core inflation. ....

While timing will be data dependent, we expect a rate cut in June as economic patterns falter. Particularly, domestic demand is weak with declining per capita performance, and investment has retrenched sharply. There will be a temporary boost in January to GDP from the public sector which will fade, while labour market slack will likely increase. Shelter will be an ongoing challenge for inflation, but a lower policy rate would feed through mortgage interest costs, while the Bank has little influence on drivers like housing supply or immigration. We expect the Bank to “look through” shelter costs as it assesses the timing of a cut.

Read more from economists, and the market bets for future rate cuts.

– Darcy Keith

11:15 a.m

More quotes from Macklem at the BoC press conference

Macklem on inflation: “Shelter price inflation is the biggest contributor to inflation right now. It’s certainly weighing on our decisions. Having said that, our target is for total CPI inflation.”

Macklem on rate cuts: “Yes, there will come a time when it’s time to cut rates.”

Macklem on inflation risks: “We’re looking at the balance of risks overall. We’re not targeting the housing sector. We’re targeting inflation and we’ve got to look at the whole economy.”

Macklem on BoC’s policy: “It would be great if this worked faster. This would be great if it was less painful. But unfortunately, monetary policy does work slowly.”

Macklem on the future of interest rates: “It’s fair to say that in giving indications of where we think things are headed on interest rates, we want to give Canadians as much information as we have. We also don’t want to give a sense of false precision.”

Macklem on lowering interest rates: “I think it’s very safe to say we’re not going to be lowering rates at the pace we raised them.”

– Matt Lundy and Rachelle Younglai

11:10 a.m

Macklem on easing underlying inflationary pressures

Macklem: “We are seeing a gradual easing in underlying inflationary pressures. The risk is that that stalls and you don’t get back to 2-per-cent inflation. … We don’t want inflation to get stuck materially above our target.”

– Matt Lundy

11:05 a.m

Macklem on wage growth and labour market

Macklem on wage growth: “We were in a situation that the labour market was very overheated. … The labour market has come back into better balance. Vacancies were very high, they have come down. They’re actually now at more normal levels.”

Mr. Macklem added that wage growth is showing signs of easing, which will help in achieving the 2-per-cent inflation target.

Macklem on the labour market: “So far, we brought inflation down a lot without a recession, without a large increase in unemployment. The labour market adjustment has been relatively gradual, relatively smooth and we’ve moved from a very overheated market to a better balance.”

On risks to inflation, Mr. Macklem noted that attacks in the Red Sea are affecting global transportation and shipping costs.

– Matt Lundy

10:55 a.m

What BoC’s March decision means prospective homebuyers

Open this photo in gallery:

The central bank’s decision to hold its benchmark interest rate steady will give prospective homebuyers more confidence to get back into the housing market.

Activity has already started to increase with more homebuyers viewing properties and making purchases.

National home sales climbed in December and January. In Toronto, the country’s largest real estate market, the typical home price rose last month for the first time since last summer.

Realtors have reported that bidding wars are starting to emerge in some areas, such as the Toronto suburbs.

Although mortgage rates are much higher than in 2022, brokers say that prospective buyers are hoping to make a purchase before the real estate market rebounds into another frenzy.

“Buyers are coming off the sidelines. They want in before rates come down and push home prices higher,” Victor Tran, a mortgage expert with Ratesdotca Group Ltd., said in an e-mailed statement.

At the same time, the steady benchmark rate has given current mortgage borrowers time to adjust to the higher borrowing costs. The latest bank results show that fewer borrowers are adding unpaid interest to their mortgages.

Real estate experts predict more buyers will come out in earnest after the central bank’s first interest rate cut. Central bank Governor Tiff Macklem gave no indication of when that would occur.

“It’s still too early to consider lowering the policy interest rate,” he said in prepared remarks posted on the bank’s website.

The Bank of Canada’s statement announcing today’s interest rate policy did not mention real estate or the housing market.

– Rachelle Younglai

10:50 a.m

Markets react to the latest BoC interest rate decision

Two-year bond markets were almost completely unfazed by the widely expected announcement to leave rates unchanged. Two-year yields were roughly 4.04 per cent in early trading, falling to 4.0 per cent at 8:30. Yields didn’t budge on the announcement and have been trading in a narrow range surrounding 4.02 per cent.

How markets and economists are reacting to the BoC interest rate decision

Five-year bonds also took the news on rates in stride. Five-year yields showed a near-uninterrupted fall from early this morning to 9:00 a.m., dropping from 3.43 per cent to 3.39 per cent. The yield increased by two basis points between then and the 10:00 a.m. announcement and are hovering in that vicinity in the wake of the report.

– Scott Barlow

10:45 a.m

Bank of Canada offers few clues on rate cuts in press release

Heading into the Bank of Canada’s rate decision on Wednesday, investors were holding out faint hope that interest rates would be lowered next month. Increasingly, that looks like a pipe dream.

The central bank – which held rates steady at 5 per cent, as widely expected – offered few clues about when it will start to lower its policy rate in a press release. Once again, it highlighted its concerns with inflation, which could flare up if the BoC eases monetary policy too soon.

In central banking, there are relatively few surprises, and decisions tend to get telegraphed in advance. Put another way, if the Bank of Canada isn’t explicit that it’s nearing the point of lowering interest rates, then it’s not happening in the immediate future.

“It’s still too early to consider lowering the policy interest rate,” Governor Tiff Macklem said in the prepared text of his opening statement for Wednesday.

As of Tuesday afternoon, money markets indicated there was still a 36-per-cent chance the BoC could cut rates by a quarter-point at its next meeting on April 10. Economists on Bay Street tend to think the first cut will arrive at the following meeting (June 5) or the one after that (July 24).

Inflation is making some headway of late. The annual Consumer Price Index change was 2.9 per cent in January, bringing it within the BoC’s target range of 1 per cent to 3 per cent – a rare occurrence over the past three years.

Still, many core measures of inflation, which remove extreme price swings, are too high for comfort.

“Recent inflation data suggest monetary policy is working largely as expected,” Mr. Macklem said in his statement. “But future progress on inflation is expected to be gradual and uneven, and upside risks to inflation remain. Governing Council needs to see further and sustained easing in core inflation.”

The March decision was a stay-the-course affair. Thus, keep an eye on the April rate decision for signs the Bank of Canada will tee up a summer rate cut.

– Matt Lundy

10:30 a.m

Key quotes from Macklem’s press conference opening statement

Open this photo in gallery:

No big surprises in the data:

“In the six weeks since our January decision, there have been no big surprises. Economic growth has remained weak, and inflation has eased further as higher interest rates restrain demand and relieve price pressures. But with inflation still close to 3 per cent and underlying inflationary pressures persisting, the assessment of Governing Council is that we need to give higher rates more time to do their work.”

It’s too early to consider cuts:

“It’s still too early to consider lowering the policy interest rate. Recent inflation data suggest monetary policy is working largely as expected. But future progress on inflation is expected to be gradual and uneven, and upside risks to inflation remain. Governing Council needs to see further and sustained easing in core inflation.”

Economy slightly better than expected, but still weak:

“Global growth has slowed and inflationary pressures have continued to ease. The U.S. economy also slowed but has remained surprisingly strong even as inflation has continued to decline. In Canada, economic growth has come in somewhat stronger than projected in the January [Monetary Policy Report], but the pace remains weak and below potential. Growth in the second half of 2023 was close to zero, allowing supply to catch up to demand.”

Some easing in labour markets:

“Labour markets have continued to ease gradually. With employment growing more slowly than population, the labour market has come into better balance. Job vacancies have returned to more normal levels, and the pace of hiring has been modest. Wage growth has been in the 4 per cent to 5 per cent range for a while, but there are now some signs that wage pressures may be easing.”

What’s happening to inflation:

“Consumer price index inflation eased to 2.9 per cent in January. This largely reflected lower energy prices, an easing in food price inflation, as well as weakness in semi-durable prices like footwear and clothing. But shelter price inflation remains elevated and is still the biggest contributor to overall inflation. More broadly, underlying price pressures persist. Our preferred measures of core inflation eased in January but remain above 3 per cent on a year-over-year and three-month basis. As well, the share of CPI components rising faster than 3 per cent declined but is still above the historical average.”

What the bank is watching:

“We remain focused on the indicators of inflationary pressures that we’ve mentioned before. Demand pressures have eased, and the economy now looks to be in modest excess supply. With the labour market coming into better balance, we are looking for further evidence that wage growth is moderating. Before our April decision, we will also get new information on corporate pricing behaviour and inflation expectations. We will be looking for the frequency and size of price increases to continue to normalize and for short-term inflation expectations to ease further.”

– Mark Rendell

10:15 a.m

Analysis: Too soon to wonder about the effects of lower interest rates?

Open this photo in gallery:

The countdown to cuts in the Bank of Canada’s benchmark interest rate continues for another month at least, but it’s not too soon to wonder about the negative effects of lower interest rates.

The housing market was on fire in January in some cities and, while it seems to have cooled some in February, it looks like there is strong pent-up demand for real estate. Lower rates could be just the thing to heat up the market, especially with the traditionally busy spring buying season just ahead.

Hotter housing sounds amazing if you already own a home, but it means worsening affordability in an already expensive market. First-time buyers will want to watch all of this closely.

Fixed-rate mortgages are priced off of rates in the bond market, which have held their ground in recent days because of lingering concerns about inflation. A rate cut by the Bank of Canada would be a clear signal that inflation is softening, and that in turn could help lower the cost of fixed-rate mortgages.

A drop in the Bank of Canada’s overnight rate would be immediately reflected in the cost of variable-rate mortgages, which aren’t as popular as they were back when rates were falling. But if the Bank of Canada is seen as being in rate-cutting mode, variable-rate mortgages become an attractive option for buyers.

If all stays calm in housing, lower mortgage rates would make the purchase of a house or condo more affordable. But it’s starting to look as if lower rates could ignite sales and push up prices to a point where the benefit of lower borrowing costs is offset.

There are a lot of uncertainties weighing on housing, including rising mortgage delinquencies and the potential for a recession that hurts the job market. But buyers are out there, and lower mortgage rates might energize them.

– Rob Carrick

9:45 a.m

Bank of Canada keeps key interest rate steady

The Bank of Canada held its benchmark interest rate steady for the fifth consecutive time, in a tight-lipped decision that offered few hints about the timing of future rate cuts.

The widely anticipated move keeps the policy interest rate at 5 per cent, a level reached last July after one of the most aggressive monetary policy tightening campaigns in Canadian history, aimed at tackling runaway price increases.

The rate of inflation has fallen considerably over the past 18 months, and economic growth in Canada has slowed to a crawl under the weight of elevated borrowing costs.

At this point, central bank officials think further rate hikes are unlikely. But they’re not yet willing to entertain rate cuts, which would offer relief to homeowners with mortgages and businesses struggling to pay debts.

“We don’t want to keep monetary policy this restrictive for longer than we have to. But nor do we want to jeopardize the progress we’ve made in bringing inflation down,” Mr. Macklem said in the prepared text of his press conference opening statement.

Read the full story on today’s BoC rate announcement.

– Mark Rendell

9 a.m

Analysts watching for signals about end of quantitative tightening

Open this photo in gallery:

There’s growing speculation that the Bank of Canada will wind down its quantitative tightening program in the coming months, although few observers expect the bank to show its hand on the issue on Wednesday.

Over the past two years, the bank has been shrinking the size of its balance sheet, which ballooned during the earlier phases of the COVID-19 pandemic when it purchased hundreds of billions worth of government bonds to try to stimulate the economy.

This normalization process, called quantitative tightening, or QT, involves letting the bonds the central bank owns mature without replacing them. This pulls money out of the financial system and reinforces the bank’s high interest rates.

Bank officials said last year that they expected to end QT in late 2024 or early 2025, at which point the bank would start buying bonds again to stabilize its assets and liabilities. However, recent signs of strain in short-term lending markets have led private-sector economists to argue the bank will need to end QT sooner rather than later to improve market functioning.

Deputy governor Toni Gravelle is scheduled to give a speech about the bank’s balance sheet later in March, suggesting bank officials will remain tight-lipped about QT on Wednesday. But you can expect Governor Tiff Macklem to be asked about the issue at the press conference.

Read more as speculation mounts into the future of quantitative tightening.

– Mark Rendell

8:25 a.m

What do analysts and investors expect today?

Most economists, traders betting on a June rate cut

Inflation has fallen substantially over the past 18 months, from an annual rate of 8.1 per cent in mid-2022 to 2.9 per cent in January. That’s led to market speculation that the Bank of Canada could begin easing its restrictive monetary policy in the coming months.

A Reuters poll of private-sector economists conducted last week found a clear majority (19 of 31) expect the first quarter-point rate cut will come in June. Five pencilled in an April cut, while the remainder thought the first cut would come later in the summer.

That’s roughly in line with market pricing. Interest-rate swaps, which capture market expectations about monetary policy, put the odds of an April rate cut at around 40 per cent, according to Refinitiv data. This rises to 75 per cent for a rate cut by June. Markets are pricing in four rate cuts by the end of the year.

Governor Tiff Macklem has said that the bank could begin cutting interest rates before inflation gets all the way back 2 per cent, given that monetary policy changes work with a lag. In January the bank projected inflation will remain around 3 per cent until the middle of the year, before declining to around 2.5 per cent by the end of the year and back to 2 per cent in 2025.

– Mark Rendell

7 a.m.

Bank of Canada expected to hold rates steady, even with inflation back in target range

The Bank of Canada is expected to hold interest rates steady on Wednesday, while analysts will be watching for hints about upcoming rate cuts, with inflation now back within the central bank’s target range.

Governor Tiff Macklem and his team have been in wait-and-see mode since last July, keeping the bank’s policy rate at 5 per cent for four consecutive rate decisions. Mr. Macklem said in January that further interest rate hikes are now unlikely. However, he refused to give a timeline for rate cuts.

With the Canadian economy barely growing and inflation inching closer to the bank’s 2 per cent target, Bay Street analysts believe Mr. Macklem will start easing monetary policy in the coming quarters. The key question is whether the first rate cut will come in April, June, July, or even later.

Recent inflation data has come in better than expected, falling to an annual rate of 2.9 per cent in January, back within the bank’s 1 per cent to 3 per cent target range. That bolsters the argument for an earlier cut.

At the same time, bank officials say they need to see several months of positive inflation data before they’re confident price pressures are easing in a sustainable way. And they’re wary of cutting too soon and having to reverse course later – especially with the spring real estate market heating up in many cities in anticipation of interest rate cuts.

In what will likely be a no-fireworks rate announcement, most of the attention will be on the tone of the bank’s rate decision statement and on the press conference by Mr. Macklem and senior deputy governor Carolyn Rogers.

If the central bankers play up the decline in headline inflation, that would be taken as a dovish signal, suggesting an openness to earlier cuts. If they emphasize stubbornly high core inflation measures, which strip out volatile price movements, it would read as hawkish, potentially pushing back market bets for the first rate cut to later in the summer.

Analysts will also be watching how Mr. Macklem and Ms. Rogers talk about housing. Shelter inflation, which includes rent, mortgage-interest costs and other housing-related expenses, is now the single biggest driver of overall CPI inflation. This puts the bank in a tricky spot: it could lower mortgage costs by cutting interest rates, but that would likely push up housing prices.

Mr. Macklem has said several times in recent months that monetary policy can’t do much to address Canada’s housing affordability problem, which is being driven by a structural mismatch between housing supply and demand. That has led some economists to suggest the bank should play down shelter inflation when deciding the timeline for rate cuts. Watch closely for the bank’s commentary on this issue.

Read more about today’s Bank of Canada announcement.

– Mark Rendell

Editor’s note: A previous version of this article incorrectly referred to growing speculation that the Bank of Canada will wind down its quantitative easing program in the coming months. The bank has been in the process of quantitative tightening. This version has been updated.