As had been widely anticipated, the Bank of Canada held its benchmark overnight rate at 5 percent this morning, and language in the accompanying statement, Monetary Policy Report, and prepared comments remained steadfastly neutral, leaving market expectations for a rate cut at the June meeting largely unchanged.

It the official statement setting out the decision, policymakers acknowledged weakness in the economy at the end of last year, and noted that labour market conditions continue to ease. “Employment has been growing more slowly than the working-age population and the unemployment rate has risen gradually, reaching 6.1 percent in March”.

But updated projections in the Monetary Policy Report showed the Bank’s economists expect growth to hit 1.5 percent in 2024 – up from the previous 0.8-percent estimate – and 2.2 percent in 2025, as household spending recovers in the second half of this year, and business investment ramps up on stronger export demand. This aligns with the better-than-expected data delivered thus far this year, with growth tracking well above the Bank’s January projections.

Officials noted “easing in price pressures becoming more broad-based across goods and services,” but warned “shelter price inflation is still very elevated, driven by growth in rent and mortgage interest costs”. The Bank now expects inflation to hold close to 3 percent during the first half of this year – at the upper end of its target range – before cooling to 2.5 percent in the second half.

Officials maintained a high degree of policy optionality, noting that they hoped to see “evidence that this downward momentum” in inflation is sustained, particularly core inflation, before making adjustments.

In prepared remarks released ahead of the press conference, Governor Tiff Macklem said “We are seeing what we need to see, but we need to see it for longer to be confident that progress toward price stability will be sustained”.

The Canadian dollar is holding this morning’s losses as borrowing costs soar and rate differentials widen relative to the US, but this could change if Macklem sounds more optimistic on the economic outlook during the press conference.