The Bank of Canada today maintained its overnight interest rate target at 5% and continued its quantitative tightening policy.
The central bank expects to reach its 2% inflation target by 2025.
Source: Taken by 51 reporters
The central bank expects the global economy to continue to grow at a rate of around 3%, with inflation gradually easing in most advanced economies. Once again, the U.S. economy has been shown to be stronger than expected, driven by resilient consumption and strong corporate and government spending. U.S. GDP growth is expected to slow in the second half of the year, but it will still be stronger than forecast in January.
The eurozone is expected to gradually recover from its current weak growth. Global oil prices have risen and are on average about $5 higher than projections in the January Monetary Policy Report (MPR). Bond yields have risen since January, but overall financial conditions have eased as corporate credit spreads have narrowed and equities have risen sharply.
The Bank of Canada has raised its forecast for global GDP growth to 2.75% in 2024 and around 3% in 2025 and 2026. Inflation continues to slow in most advanced economies, but progress is likely to be bumpy. Inflation is expected to reach the central bank's target in 2025.
In Canada, economic growth stalled in the second half of last year, and the economy fell into an oversupply. A broad range of indicators point to continued easing of labor market conditions. Employment growth has been slower than growth in the working-age population, and the unemployment rate has gradually risen, reaching 6.1% in March. There have been some recent signs that wage pressures are easing.
Economic growth is expected to accelerate in 2024. This largely reflects strong population growth and a recovery in household spending. Residential investment is stepping up in response to continued strong housing demand. The contribution of government spending to economic growth has also increased. Business investment is expected to recover gradually after a sharp contraction in the second half of last year. It is expected that in 2024, exports will continue to grow steadily.
Overall, the central bank forecasts GDP growth of 1.5% in 2024, 2.2% in 2025 and 1.9% in 2026. From 2025 to 2026, the growing economy will gradually absorb excess supply.
CPI inflation slowed to 2.8% in February, and the easing of price pressures became more prevalent in the goods and services sector. However, housing price inflation remains very high due to rising rent and mortgage interest costs.
The core inflation gauge has been around 3.5%, falling to just over 3% in February, and the three-month annualized inflation rate is showing downward momentum. The central bank expects CPI inflation to be close to 3% in the first half of this year, below 2.5% in the second half of the year, and to reach the 2% inflation target in 2025.
Based on this outlook, the Governing Council decided to keep the policy rate unchanged at 5% and continue to normalize the bank's balance sheet.
While inflation remains too high and risks remain, CPI and core inflation have slowed further in recent months. The Committee will look for evidence of the continuation of this downward momentum. The Governing Council is particularly concerned about the evolution of core inflation and continues to focus on the balance between supply and demand, inflation expectations, wage growth, and corporate pricing behavior in the economy.
Source: 51 Network reporter
The market expects the Canadian dollar to weaken further
Institutions such as Wells Fargo, Monex Europe Ltd., Royal Bank of Canada and Bank of America expect the Canadian dollar to weaken further relative to the US dollar in the coming months, as they believe the Bank of Canada will adjust interest rates more dovish and hint that it could cut rates earlier and more aggressively than the Fed this year.
Simon Harvey, chief analyst at Monex Europe, wrote in a note: "We think there is a significant risk that the market could be hit by central banks. ”
He expects the Canadian dollar to hit the $1.39 level by June, having last touched it in November. On Tuesday, the exchange rate was around 1.3590 Canadian dollars per dollar.
Markets are pricing in an 18% chance of a rate cut by the Bank of Canada on Wednesday, compared to a 21% chance in the past week.
Even if interest rates remain unchanged as expected by Monex Europe and other banks, the CAD is still at risk of further declines as the market already expects the Bank of Canada to cut rates more than the Fed and possibly to cut rates more aggressively. Traders expect the Bank of Canada to cut rates by 68 basis points this year, while the Federal Reserve is expected to cut rates by 66 basis points.
Erik Nelson, FX strategist at Wells Fargo, said: "Given the latest employment and inflation data, we expect the Bank of Canada to open the door to rate cuts in June, which should put more downward pressure on the Canadian dollar." ”
Bank of America also expects Canadian rate cuts to begin in June, while Royal Bank of Canada expects the Canadian dollar to fall to $1.3750 in 2024 as the market pricing in more rate cuts by the Bank of Canada than the Fed.