Whereas the Financial institution of Canada left its benchmark fee unchanged as anticipated right this moment, markets as an alternative turned their consideration to the discharge of one other sizzling inflation report out of the U.S.

U.S. CPI inflation was 0.4% in March, a repeat of the sturdy studying seen in February and a part of an uptrend in headline inflation this yr. On an annualized foundation, inflation rose by a higher-than-expected 3.5%, resulting in a surge in bond yields and a selloff in fairness markets.

That is necessary because of the implications for each the Federal Reserve and in flip the Financial institution of Canada’s future financial coverage selections.

“The March CPI inflation report is an unwelcome message to the markets that the Fed’s inflation combat is way from over,” famous BMO’s Scott Anderson.

Because of this, fee cuts may very properly get pushed out to later this yr, or probably even till subsequent yr, says Scotiabank’s Derek Holt.

“Overlook fee cuts in 2024? That’s a really distinct risk,” he wrote, pointing to the almost prompt response by markets that every one however eradicated their pricing for a June fee lower by the Fed.

“Markets are actually pricing a few half proportion level cumulative fee lower by year-end at most,” he added. “As for the BoC, they’re…much less prone to flip dovish now given the danger of completely un-mooring CAD with the Fed being pushed down and out.”

A special inflation story in Canada

In its assertion right this moment, the Financial institution of Canada did sound a touch dovish, pointing to progress made on reining in inflation and noting that the easing is turning into extra broad-based throughout each items and companies.

“Whereas inflation continues to be too excessive and dangers stay, CPI and core inflation have eased additional in current months,” the Financial institution mentioned. “The Council might be in search of proof that this downward momentum is sustained.”

In February, headline inflation eased to 2.8%, whereas each of the Financial institution of Canada’s most well-liked measures of core inflation additionally slowed greater than anticipated.

In its newly launched forecast included in right this moment’s Financial Coverage Report, the BoC mentioned it now expects headline inflation to stay close to 3% for the primary half of this yr earlier than transferring beneath 2.50% within the second half.

“The Financial institution of Canada was mildly extra dovish noting the encouraging core inflation development and softening labour market,” wrote BMO’s Benjamin Reitzes. “Nevertheless, policymakers want extra proof that this development will proceed earlier than they’re keen to start out easing.”

James Orlando, senior economist at TD Economics, mentioned that although inflation is now throughout the Financial institution’s impartial goal vary of between 1% and three%, “markets have change into extra cautious on the timing of cuts.”

A part of that is because of right this moment’s sturdy U.S. inflation report, as talked about above, but additionally resulting from stronger-than-anticipated GDP progress right here in Canada.

On that entrance, the Financial institution of Canada additionally upwardly revised its GDP progress forecasts to a mean of 1.5% in 2024 from its earlier estimate of 0.8%.

At the moment’s fee resolution additionally noticed the Financial institution of Canada enhance its estimated nominal impartial fee by 25 foundation factors to a brand new vary of two.25% to three.25%. The impartial fee is outlined as the actual rate of interest that balances the economic system at full employment and most output.

“This enhance displays the impacts of an upward revision to the U.S. impartial fee and modifications in key Canadian home elements,” the BoC mentioned.

Newest Financial institution of Canada financial forecasts

In its newest MPR, the Financial institution unveiled some updates to its financial projections.

GDP forecast

The Financial institution now expects annual financial progress of:

• 1.5% in 2024 (vs. 0.8% in its January forecast)
• 2.2% in 2025 (vs. 2.4%)
• 1.9% in 2026

Inflation

In the meantime, the Financial institution’s inflation forecasts had been revised downward for this yr.

• 2.6% in 2024 (vs. 2.8%)
• 2.2% in 2025 (unchanged)
• 2.1% in 2026

The Financial institution of Canada’s subsequent fee resolution is scheduled for June 5, 2024.