Central Bank stays put in January

On 24 January, the Bank of Canada (BOC) left the target for the overnight rate at 5.00%, and announced it was continuing to reduce the stock of outstanding government bonds.

The decision to not hike rates further was driven by stalling economic activity, a softening labor market and falling core inflation, which was within the Bank’s 1.0%–3.0% target for the fourth straight month in December, following more than two years above target. However, it was premature to begin monetary easing given that core inflation is still near the top of the target range, headline inflation is still above 3.0%, and wages are still rising by 4–5% year on year.

The BOC gave more dovish forward guidance, dropping the previous meeting’s comment about raising rates further going forward. This is aligned with the Consensus of our panelists, none of whom see further rate hikes. Most panelists see rate cuts ensuing from Q2 2024. The Consensus is for the target for the overnight rate to end this year over 100 basis points below its current level, though the discrepancy in end-2024 forecasts is large at 200 basis points.

TD Economics’ James Orlando said: “Odds are pointing to the first rate cut happening in April/June. We echo this sentiment. The BoC’s tight policy has caused the economy to flatline since last summer, which has quickly pushed the job market back into balance. Even the BoC's quantitative tightening policy looks to have potentially gone too far with market overnight rates continuing to drift from the Bank's target rate.”

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