Bank of Canada still looking for sustained downward momentum on inflation

Wesley Blight

April 16, 2024

Key takeaways

The Bank of Canada’s target for the overnight interest rate remains at 5%
While inflation has eased, it remains high and risks remain
The Canadian economy is in excess supply

The Bank of Canada (BoC) has once again held its target for the overnight rate at 5%. This marks the sixth consecutive interest rate announcement where the BoC has held its policy interest rate steady since moving to 5% in July 2023. The decision was widely anticipated, as was the confirmation that the Bank will continue to normalize its balance sheet by not replacing maturing Government of Canada bonds that it holds.

The Bank continues to look for definitive evidence that downward pressure on inflation is sustainable

As we said last month, it’s likely the Bank’s current rate hike cycle is over. However, the BoC is still waiting for further evidence that the downward momentum on inflation is sustained. “Governing Council is particularly watching the evolution of core inflation and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour,” said the Bank.

Global growth projections revised slightly higher

In its latest Monetary Policy Report (MPR), the BoC projects global economic growth of 2.8% for 2024 (up from 2.5% in its previous MPR), 3.0% for 2025 (up from 2.7%) and 3.1% in 2026. From its latest statement, “the U.S. economy has again proven stronger than anticipated, buoyed by resilient consumption and robust business and government spending,” and “the euro area is projected to gradually recover from current weak growth.”

For Canada, the BoC projects economic growth of 1.5% in 2024 (up from 0.8%), 2.2% in 2025 (down from 2.4%) and 1.9% in 2026. The Bank also confirmed that Canadian economic growth stalled in the second half of 2023 and that the economy moved into excess supply.

Inflation is expected to reach BoC targets in 2025

Inflation continues to ease unevenly across most advanced economies as restrictive monetary policy continues to work to subdue inflationary pressures. Measures of core inflation slowed to just over 3% in February and data suggests downward momentum. The BoC projects Consumer Price Index (CPI) inflation to be around 3% during the first half of the year. It then expects CPI inflation to move below 2.5% to end the year, before reaching its 2% inflation target in 2025.

Scotia Global Asset Management’s Multi-Asset Management Team moves back to a neutral equity position

In our portfolios that include a tactical asset allocation overlay, we recently increased our allocation to equities overall and are now neutrally positioned relative to fixed income and cash. The short-term acceleration in economic activity is countering our expectations for a more meaningful slowdown in the global economy due to the lagged impact of tighter monetary policy. However, red flags still exist, preventing us from moving to an overweight position. Inflation and concentrated markets remain the key risks to watch.

Our fixed income positioning endures, given the expectation of lower rates in the near term. We remain long on interest rate risk and positioned for a steeper yield curve (where the difference in yields between short- and long-term bonds is greater).

You can read more about our short- and long-term outlooks and how we position portfolios here.

The BoC’s next interest rate announcement is scheduled for June 5^th.

Wesley Blight

Wesley Blight, CFA, CIM, FCSI, is a Portfolio Manager with the Multi-Asset Management Team of Scotia Global Asset Management. He is responsible for private asset and multi-asset portfolio solutions.

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