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Following today’s decision by the Bank of Canada to leave interest rates on hold, Governor Tiff Macklem said plainly that rate cuts aren’t yet on the table.

“It’s still too early to consider lowering the policy interest rate,” he said in prepared remarks for today’s press conference.

“Recent inflation data suggest monetary policy is working largely as expected,” he continued. “But future progress on inflation is expected to be gradual and uneven, and upside risks to inflation remain.”

He reiterated the message from the Bank’s statement earlier in the morning that Governing Council wants to see further and sustained easing in core inflation.

Concerns about core inflation

Headline inflation has dropped sharply over the past year and a half, falling to a rate of 2.90% as of January from its peak of 8.1% in June 2022. That puts it within the Bank of Canada’s neutral target range of 2% to 3%.

But core inflation, specifically the Bank’s two preferred measures of core inflation, CPI-trim and CPI-median, have remained stubbornly above that target range, at 3.4% and 3.3%, respectively.

“The Council is still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation,” the Bank said in its rate announcement, adding that it wants to see “further and sustained easing in core inflation.”

Similarly south of the border, Federal Reserve Chair Jerome Powell reiterated the Fed’s focus on bringing inflation back to its neutral level before shifting to monetary policy easing.

“We believe that our policy rate is likely at its peak for this tightening cycle. If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year,” he said in a prepared statement in his semi-annual Monetary Policy Report.

“[But] the Committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”

Mid-year rate cuts still on track

While today’s Bank of Canada statement was more balanced than some economists had expected, most agree that if inflation continues to trend downward in the coming months, the first rate cut could still be on track for the Bank’s June meeting.

Bond markets continue to price in nearly 90% odds of a rate cut at the Bank’s June 5 meeting.

“While the Bank of Canada may not have been prepared to fully commit to rate cuts at this meeting, by recognizing the progress made, it is setting the stage for cuts to come,” noted economists from Desjardins. “We continue to be of the view that the Bank will begin cutting interest rates at its June meeting.”

The BoC also noted that future rate decisions will be guided by indicators such as supply-demand balance, wage growth, inflation expectations and corporate pricing behaviour, which it will be monitoring closely.

“On that front, April’s Business Outlook Survey (to be released on April 1st) will offer important updates,” economists from National Bank Financial wrote. “Thus, it’s the next decision where more substantive changes to the BoC’s stance could be introduced. We feel it’s probably too early to deliver a rate cut at the April meeting but policymakers could use the decision to open the door to easing in June.”

Featured image: Cole Burston/Bloomberg via Getty Images

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