The Bank of Canada (BoC) kept the overnight rate at 5% on Wednesday as expected and noted that it was too early to consider a reduction, given the continued consistency of inflation.
The news helped boost the Canadian dollar by 0.4% to 1.3540 against the US dollar, or 73.86 US cents. Prior to the announcement, money markets had fully priced in expectations for a rate cut in June. Macklem's comments prompted them to postpone again until July.
The BoC raised interest rates by 475 basis points to a 22-year high between March 2022 and July 2023 and has kept them at that level in its bid to stabilize inflation while preventing the country from falling into recession. Inflation has gradually eased and markets have been expecting a reduction by June.
Governor Tiff Macklem said more time was needed to keep inflation down toward the central bank's 2% target.
"It is still too early to consider lowering the base interest rate, at the same time inflation is expected to decrease gradually and unevenly," he said in his opening speech to reporters. "It is still too early to ease the restrictive policies in place" A majority of economists in a Reuters poll last week predicted the central bank would start cutting interest rates in June. Inflation remained above 3% throughout the past year but eased to 2.9% in January. Macklem stressed that the bank expects inflation to be near 3% until mid-2024 before declining in the second half.
"The Governing Council remains concerned about the consistency of underlying inflation and we would like to see further declines in core inflation over the coming months," continued Macklem.
He reiterated his comment from the January policy announcement that the discussion in the Administrative Committee was moving away from whether the rate would be enough to last for a certain period of time or not.
