Bank of Canada holds key interest rate at 5%, says things moving in right direction

The Bank of Canada has held its key interest rate at five per cent for the sixth consecutive time since July, saying it will look for signs that slowing inflation is sustainedbefore moving on rate cuts.

The central bank said that inflation is still too high, but noted thatcore inflationmeasures which stripout volatile sectors like food and energy have trended downward in recent months.

"I realize that what most Canadians want to know is when we will lower our policy interest rate. What do we need to see to be convinced it's time to cut?" Bank of Canada governor Tiff Macklem said during a newsconference following the announcement.

"The short answer is we are seeing what we need to see, but we need to see it for longer to be confident that progress toward price stability will be sustained. The further decline we've seen in core inflation is very recent. We need to be assured this is not just a temporary dip."

Macklem said that a rate cut in June is "within the realm of possibilities."

WATCH | Tiff Macklem doesn't rule out June rate cut:

Bank of Canada wont speculate about cutting interest rates

5 months ago

Duration 2:09

The Bank of Canada is holding its key interest rate at 5 per cent, saying it needs to see sustained slowing of inflation before it will cut the rate. It is not ruling out a June cut.

While inflation cooled to 2.8 per cent in February, with price growth slowing across goods, food, clothing andservices,high rent and mortgage interest costs continue to drive up the overall inflation rate.

The bank expects inflation will move closer to its two per cent target this year, andthat it will reach it in 2025.The bank also expects solid GDP growth this year and in 2025, due to population growth and increased household spending.

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"As we consider how much longer to hold the policy rate at the current level, we're looking for evidence that the recent further easing in underlying inflation will be sustained," Macklem said.

The Bank of Canada first raised interest rates in March 2022, the beginning of an aggressive campaign to cool inflation that resulted in 10 rate hikes in less than two years.

Bankjust needs to see 'more of the same': economist

"It seems like the Bank of Canada is telling Canadians that rate cuts are on the horizon and it might not be so long before they become a reality," said economist Royce Mendes, managing director at Desjardins Capital Markets.

He said that thelonger the bank holds interest rates at fiveper cent, the more it risks tipping the economy into an unnecessary recession.

Mendes added that he thinksthe central bank will start cutting rates at its next meeting on June 5, and that it will continue to cut in small increments atsubsequent meetings from then on.

WATCH | Earlier this year, Macklem explains why core inflation is so important:

'Why do we care about core inflation?' Bank of Canada governor explains

6 months ago

Duration 1:54

Tiff Macklem, governor of the Bank of Canada, says core inflation which strips out volatile parts of the consumer price index gives the bank a sense of where the trend is.

"All they needed to see for rate cuts to become a reality was more of the same, which is really great news," Mendes said.

Economists have forecast that the Bank of Canadawill lead the U.S. Federal Reserve in rate cuts as economic data in both countries have been diverging.

"The U.S. economy right now is extremely strong, whereas the Canadian economy is struggling," Mendes said.

The U.S. economy grew at a faster pacethan expected in the fourth quarter, while January GDP data showsthat the Canadian economy began 2024 on a stronger noteafter last year's weak activity.

U.S. inflationincreased more than expected in March by 0.4 per centafter advancing by the same amount in February, pushing hopes of a Fed rate cut further into the second half of the year.

Macklem said he did not see a big impact from U.S. inflation on Canada.