The Bank of Canada is anticipated to maintain its key overnight rate during its Wednesday meeting. That being said, due to persistently high inflation, there is a reassessment of the timing for the initial rate cut.
In the past three months, prices either decreased or held steady compared to the previous year. However, overall inflation in December rose to 3.4%, up from 3.1%, and core inflation data showed unexpected growth.
This shift in inflation figures has led money markets to revise their expectations. Financial markets are now unanimously anticipating a 25 basis point rate cut by June, with the likelihood of a similar cut in April dropping to 70% from the previous 100% before the release of December's inflation data.
Economists highlight that, prior to the recent inflation data, conditions favored a rate cut. However, the recent uptick in inflation eliminates any possibility of a rate cut this week, and even in March, the likelihood is deemed extremely low.
Analysts suggest that inflation in Canada is likely to exhibit greater resilience compared to the United States, and the Bank of Canada is expected to mirror the Federal Reserve in making its first rate cut this year.
According to a Reuters poll, all 34 economists anticipate the Bank of Canada maintaining its key rate at 5% both on Wednesday and in March. However, 12 of them foresee a rate cut in April, while two-thirds expect the initial cut to occur in June or later.
The Bank of Canada is scheduled to announce its rate decision on Wednesday morning and will unveil its quarterly monetary policy report. Market observers will be keeping a close eye on the remarks of the Governor of the Bank of Canada Tiff Macklem concerning the future trajectory of interest rates.
In October, the Bank of Canada conveyed its anticipation for inflation to rebound to its 2% target by the end of 2025, projecting 0.8% annualized growth in the third and fourth quarters of the preceding year.
From March 2022 to July of the previous year, the Bank of Canada implemented a series of interest rate hikes to counteract inflation. Despite a slowdown from its peak of 8.1% in June 2022, headline inflation persists above the 2% target.
The Bank of Canada's core inflation data for December indicates that full support for core inflation has not yet materialized. The three-month annual rate for CPI-trim and CPI-median rose to 3.6%.
Despite stable housing costs and a consistent 4-5% increase in wages, Canada continues to grapple with significant inflation. Concerns about an economic slowdown are mounting, particularly with the country's economy contracting by 1.1% year-on-year in the third quarter of 2023. Data for the fourth quarter is scheduled for release on January 31.
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