Bank of Canada holds policy rate but maintains a hawkish bias

As expected, the Bank of Canada (BoC) held the target for the overnight rate steady at 4.5% in April and is continuing quantitative tightening. Despite recent banking sector turmoil in the US, the BoC maintained a hawkish bias and was clear that it is willing to raise rates further if needed to return inflation sustainably to the 2% target.

What you will learn:

• Canada’s GDP growth has slowed in recent quarters and strong labour supply growth has helped relieve labour shortages to a degree, but the Bank believes the economy remains in excess demand and the labour market is still quite tight – warranting a restrictive policy stance.
• Inflation has eased largely as the Bank expected in its January Monetary Policy Report (MPR). The Bank forecasts inflation will drop sharply to around 3% by mid-2023, before returning to its 2% target by the end of 2024. However, the Bank highlighted that this is mainly due to lower energy prices and that three-month measures of core inflation will need to moderate further.
• While the BoC is confident inflation will continue to fall in the near term, the governing council is concerned that returning inflation to target may be difficult due to elevated short-term inflation expectations, sticky service inflation, corporations passing on higher costs to consumers, and wage growth that remains too high to be consistent with underlying inflation of 2%.