Canada holds interest rates steady

Let your friends with variable-rate mortgages know you’re thinking of them this week.

What happened: As expected, the Bank of Canada held the policy rate steady at 5% for the sixth consecutive meeting, noting that "inflation is still too high and risks remain" in the form of a resilient growth forecast, even though both inflation and the labour market are cooling.

• According to a recent note by BMO economist Benjamin Reitzes, “policymakers need more evidence that [these trends] will continue before they're willing to start easing.”

Why it matters: Canada has so far managed to grow the economy while tamping down on inflation (a textbook ‘soft landing’ case), but with inflation still hovering around 3% the work is far from over. As people get used to inflation running high, the harder the bank’s job gets. 

• Economists are largely still expecting a rate cut at the next policy meeting in June, but the central bank has been careful not to suggest that any cut is a guarantee.
  
  
• Plus, any more shocks to the system, including new government spending, supply squeezes, worsening conflicts, or natural disasters would complicate things further.

Zoom out: The bank will also keep an eye on what’s happening south of the border. After another round of still-too-hot inflation data, a June rate cut from the Federal Reserve seems unlikely. If Canada cuts more aggressively, it could devalue the loonie against the USD.—SB