Following through on a well-telegraphed pledge to hold policy steady, the Bank of Canada held its benchmark overnight rate at 4.50 percent this morning, and reiterated a “conditional” commitment to staying the course. The statement-only decision was not accompanied by new forecasts, but officials said “the latest data remains in line with the Bank’s expectation that CPI (Consumer Price Index) inflation will come down to around 3 percent in the middle of this year. Year-over-year measures of core inflation ticked down to about 5 percent, and 3-month measures are around 3½ percent. Both will need to come down further, as will short-term inflation expectations, to return inflation to the 2 percent target”.

“Restrictive monetary policy continues to weigh on household spending, and business investment has weakened alongside slowing domestic and foreign demand,” but “The labour market remains very tight. Employment growth has been surprisingly strong, the unemployment rate remains near historic lows, and job vacancies are elevated”

Central bankers repeated language used in the January statement, saying “Governing Council will continue to assess economic developments and the impact of past interest rate increases, and is prepared to increase the policy rate further if needed to return inflation to the 2 percent target”.

The Canadian dollar tumbled another 30 basis points in the moments after the announcement. After extensive telegraphing from policymakers, observers were well prepared for the headline decision itself, but many (including ourselves) expected a slightly more hawkish bias in the statement. Odds on another quarter-point move in the months ahead are falling, helping widen rate differentials against the US dollar. Canadian two-year yields are now 63 basis points lower than their US equivalents, while the ten year spread favours the US by 61 basis points.

From a broader perspective, the Canadian economy has outperformed expectations in recent months, and looks set to gain lift from a revival in US consumer demand. But there are important vulnerabilities, most obviously in an over-indebted household sector that will have difficulty accommodating the 425 basis-point rise in interest rates that unfolded over the course of the last year. We suspect the loonie – which remains the second-worst G10 performer this year – could struggle to gain headway amid ever-tighter global financial conditions.