Bank of Canada Holds Overnight Rate at 5.00% and Signals No Imminent Cuts

The Bank of Canada held its overnight target rate at 5.00% on 24 January 2024, keeping the benchmark at a level unchanged since the previous summer as the Governing Council assessed whether restrictive monetary conditions were doing enough to return inflation sustainably to the 2% target. The decision was published on the bank's website, leaving Canada's policy rate at its highest level in more than two decades. The Governing Council used the occasion to reinforce its message that rate cuts were not yet a near-term prospect.

Canadian consumer price inflation rose to 3.4% in December 2023 from 3.1% in November, above the central bank's 2% objective. The Governing Council acknowledged the improvement in price pressures while emphasising that it was not yet ready to consider the timing of reductions to the overnight rate. Officials stressed that premature easing risked embedding inflation above target and that the current restrictive stance needed to be maintained until there was greater confidence that inflation was durably headed back to 2%.

GOVERNING COUNCIL NOT READY TO EASE

The press release made no reference to rate cuts, stressing instead that the Governing Council wanted to see further and sustained easing in core inflation and remained concerned about the persistence of underlying inflation. Governor Tiff Macklem said the council's discussion was shifting from whether monetary policy was restrictive enough to how long to maintain the current restrictive stance, while stressing that further increases had not been ruled out.

The bank indicated it would continue to assess incoming economic data to determine whether monetary policy was sufficiently restrictive. Key indicators under close scrutiny include core inflation measures, which strip out volatile components and are considered better guides to underlying price trends, as well as labour market conditions, wage growth and household consumption patterns.

INFLATION OUTLOOK

The uptick in Canadian CPI to 3.4% in December largely reflected a base-year effect in gasoline prices, while the Bank said past rate increases and weaker demand were gradually reducing price pressures. However, shelter costs and certain service-sector prices remained sticky, keeping the core inflation measures that the Bank of Canada monitors most closely above the 2% target. The bank has indicated in recent communications that it expects inflation to return to target during 2025.