Notes From the Desk – Bank of Canada Decision – Patience Young Grasshopper
As expected, the Bank of Canada (BoC) held rates steady at 4.5%. They also updated their economic forecasts:
- Inflation is expected to fall to 3% this summer and to 2% by the end of 2024.
- Growth numbers were tweaked to reflect the stronger-than-expected Q1.
- 2023: 1.4% GDP (previously 1%)
- 2024: 1.3% GDP (previously 1.8%)
- 2025: Unchanged at 2.5%
- Governor MacKlem believes that inflation can get to the 2% target without a deep recession or a significant rise in unemployment.
- The BoC maintained the option to hike if tight labour markets prevent inflation from falling.
- When asked about the potential for cutting rates, the Governor expressed that he did not anticipate cutting rates this year, despite the yield curve factoring in a cut for 2023.
- Yields are modestly higher today.
- Given the bond market is pricing in a cut later this year, we feel rates are vulnerable to moving higher on any upside surprises to growth or if inflation declines slower than anticipated.