BoC Preview: Forecasts from seven major banks, another dovish hold

We expect the BoC to leave the policy rate at 5%. The BoC is sounding a little less hawkish, but with officials not expecting inflation to return to the 2% target until next year, it's unlikely to signal that it is relaxed enough to ease monetary policy soon. As with the Fed, we are looking at June as the likely starting point for interest rate cuts.

We look for the BoC to stick to the recent script as it holds the overnight rate at 5.00% and continues to seek more evidence that inflation is on track for a sustained return to 2%. We look for the overall message to remain one of cautious optimism, and while the January CPI report skews risks towards a more dovish outcome, we do not expect the Bank will overreact to a single data point. BoC should not be market moving for the CAD as the Bank keeps a tone of guarded optimism and tries not to over-emphasize one good inflation report.

The BoC is widely expected to maintain the overnight rate steady again. An announcement on the ending of quantitative tightening is unlikely but we expect that to follow later in April. Language around the need to hike rates further was already dropped in January and is unlikely to reappear in the statement. The central bank will instead continue to highlight softening in aggregate demand while reiterating that inflation pressures, although easing are still a risk.

The BoC is all but assured to leave its policy rate unchanged for a fifth consecutive meeting. With the economy operating below potential and the labour market rebalancing, there are clear signs that tighter monetary policy is working. However, above-target inflation and sticky wage pressures will still leave the Bank of Canada unwilling to contemplate lowering interest rates in the near term. January’s much softer-than-expected CPI report may warrant acknowledgement in the press release but don’t expect them to play up a single month of data too much.

The BoC could be one of the first major G10 central banks to deliver rate cuts this year. We do not expect BoC policymakers to deliver a rate cut this week; however, we do believe policymakers may start to lay the initial groundwork for a shift to rate cuts by the middle of this year. BoC policymakers have expressed caution lately, but with growth slowing rather quickly and inflation receding, BoC cuts by June are looking like a higher probability event.

Rates will be left on hold and changes in the statement could simply acknowledge both the modest overshoot versus its growth forecast and some improvement in core inflation trends. The Bank likely wants to see some additional slack in the labour market, which we expect to see in Friday’s LFS jobs data, hoping that will lead to cooling in wage gains ahead.

The BoC is widely expected to keep policy rates unchanged at 5.0%. After the policy statement in January removed the explicit hiking bias, we do not expect many changes to the policy statement in March. But this does not necessarily mean that guidance will be quite as vague as in recent communications. While Fed officials have been open about wanting to see a few more months of softer inflation data before starting to cut rates likely around the middle of the year, BoC officials have been much less explicit about either the timing of cuts or what officials would need to see to feel comfortable lowering rates. Markets are unlikely to learn some more about the likely path to rate cuts at this meeting. This could be dovish relative to recent communications, but we do not expect that the likely conditions necessary for cuts would be met until the middle of the year.