Bank of Canada holds interest rates steady, needs more convincing before cutting

Wesley Blight

March 6, 2024

Key takeaways

  • The Bank of Canada’s target for the overnight rate remains at 5%
  • While inflation continues to trend lower, concerns remain about risks to the outlook for inflation
  • Pressure continues to ease – data suggests the Canadian economy is in modest excess supply

The Bank of Canada (BoC) has once again held its target for the overnight rate at 5%. This marks the fifth 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.

It’s likely that the Bank’s current rate hiking cycle is over, however, the BoC has not changed its stance regarding rate cuts, reiterating that “Governing Council wants to see further and sustained easing in core inflation and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.” 

Inflation continues to ease

As reported in the Bank’s announcement, “Consumer Price Index inflation eased to 2.9% in January, as goods price inflation moderated further.” However, underlying pressures remain resilient as core inflation is in the 3-to-3.5% range. Inflation is generally expected to remain around 3% during the first half of 2024 before gradually easing later in the year. Unsurprisingly, the Bank is “still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation.” 

Global economic growth continues to slow

Looking at the fourth quarter of 2023, U.S. growth slowed but remained surprisingly strong and broad based. Eurozone growth was flat. Canadian growth was higher than expected but “remained weak and below potential,” said the Bank. Dropping another small hint that the current rate raising campaign is over, the BoC once again suggested that the Canadian economy is in modest excess supply.  

Scotia Global Asset Management’s Multi-Asset Management Team remains cautious at this time

As we wait to see when and by how much the Bank will cut rates, we continue to exercise caution. The cumulative impact of higher rates is still very much playing out and our bear market indicators continue to flag an increased risk of recession.

In our portfolios that include a tactical asset allocation overlay, we recently increased our exposure to global equities as easing inflation in the U.S. has bolstered consumer confidence and the window for a soft landing (where the economy transitions from growth to slow- or no-growth, avoiding a recession) remains opens. Despite this, we remain underweight equities overall.

Following the decline in bond yields at the end of 2023, given the expectation for lower rates in the near future, we reduced interest rate risk and positioned portfolios for a steeper yield curve (where the difference in yields between short- and long-term bonds is greater). We remain overweight fixed income overall.

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 April 10th and will be accompanied by the latest Monetary Policy Report.  

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.