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Bank of Canada Governor Tiff Macklem takes part in a news conference in Ottawa, on Oct. 25.PATRICK DOYLE/Reuters

In the spirit of the holiday season, the Bank of Canada wrapped up Wednesday’s interest-rate announcement in a lot of bright, shiny words that suggest that relief is coming.

But at the centre of the package, it delivered no Christmas present. Only the same lump of coal that it has been doling out for months: that it is still “prepared to raise the policy rate further if needed,” despite mounting evidence that the economy is in rapid, inflation-chilling retreat.

In doing so, it has effectively pushed back the start date for rate cuts – something the financial markets hadn’t yet figured out on Wednesday afternoon.

The bank’s warning-on-repeat about further rate hikes looked pretty incongruous with many of the other key messages in its latest announcement. In holding its policy rate steady at 5 per cent for the third straight decision, the bank said global growth and inflation have slowed further, that the Canadian economy “stalled” and that the data “suggest the economy is no longer in excess demand.”

In short, it outlined ample justification to back off its policy bias toward further hikes. It chose not to.

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One factor might have been the season itself. Historically, the Bank of Canada has been hesitant to shift its policy just ahead of the holidays, when a lot of financial market players, as well as central bankers, will be away from their desks. Should any unexpected shocks hit over the break, the bank will have avoided sticking its neck out.

But the bigger issue is that bond market participants have convinced themselves that the Bank of Canada’s first rate cuts are coming by spring, much earlier than most economists think – and, likely, earlier than the bank’s leadership, privately, has been contemplating. By maintaining its “hawkish hold” position (as many observers have labelled it), the bank may be trying to discourage that notion.

The markets weren’t convinced. Based on pricing of overnight index swaps – a proxy for rate expectations – bond market participants are placing more than 40-per-cent odds of a quarter-percentage-point rate cut at the central bank’s March setting. (That cut is fully priced into the market by the April decision.) Those expectations moved little in response to Wednesday’s announcement.

Even if the markets aren’t buying the Bank of Canada’s argument, they’re failing to do some simple finger-counting. Or they don’t understand how Governor Tiff Macklem operates.

Throughout his tenure, Mr. Macklem has demonstrated a preference to send a clear message to the markets and the public about a change in policy direction before he actually changes it, and to move in well-signalled steps. Assuming he remains on form, that would mean that for the bank to move from its current position to actually announcing a rate cut, the first step would be to shift from a hawkish to a neutral bias.

That would entail changing “prepared to raise the policy rate further if needed” to something more balanced, such as “prepared to raise or lower the policy rate if conditions change.” It could, conceivably, remain in this sort of balanced state for quite some time, before replacing that sort of statement with something along the lines of “prepared to lower the policy rate as inflation approaches the bank’s 2-per-cent target.”

Each of those language changes would require an interest-rate announcement. So, that’s a minimum of two more settings – January and March – before the bank could conceivably be one decision away from a rate cut. Even once there, Mr. Macklem and his team might decide that they need to telegraph a cut even more clearly, by all but declaring that they are ready to cut at the next rate decision.

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By sticking with the hawkish language now, the bank has certainly delayed the earliest date for a rate cut (barring some major economic shock) by one meeting. We’re looking at maybe three, quite possibly four, rate decisions into 2024 before that first cut comes into view – and that’s if the Bank of Canada moves in a straight line, starting in January.

That probably takes us out to June, if not later. It’s very, very hard to argue, as the market pricing now implies, that a cut in March is nearly a coin toss, or that April is a slam dunk.

For the time being, the Bank of Canada can lean on two key statistics to justify continuing to keep further hikes in the conversation. Core inflation measures were around 3.5 per cent year over year in November, while annual wage growth continues to run in the 4- to-5-per-cent range. Both suggest that there’s still work to be done to return overall inflation to the 2-per-cent target and keep it near there.

But the bank can’t keep up this argument much longer. The supply-and-demand mix in the economy is already either in balance or, quite possibly, already tipped into excess supply. With output growing more slowly than capacity, that oversupply state is bound to deepen – which means we’re facing accelerating disinflationary pressures, rather than inflationary ones.

By the January rate decision, assuming the economy maintains its current course, that reality might tip the bank’s scales – regardless of how financial markets feel about it. Mr. Macklem has been saying for months that the bank doesn’t want to overdo it with tight rates. It’s getting closer to overdoing-it territory now.

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