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The Bank of Canada held the overnight rate unchanged for a fifth consecutive meeting, extending a pause that started after the last hike in July last year.

Softer inflation data in January made sure that no hiking bias (dropped in January) would reappear. BoC’s key messaging remains that we’re on the right path to target inflation, but just not there yet.

The BoC highlighted weak final domestic demand in Q4 last year and easing wage pressures as evidence that high interest rates are working to restrict economic activities, but not enough to stamp upside inflationary risks yet.

Progress in lowering the BoC’s preferred core inflation measures, including CPI trim and CPI median has been slow and choppy - both measures dropped in latest data for January but were also above 3% that is the top end of the inflation target range in Canada.

Later in the press conference (that was the first for a non-MPR meeting), Governor Macklem once again confirmed that the focus of discussions at the BoC have shifted to how long rates will stay high, but also said explicitly that "It’s still too early to consider lowering the policy interest rate."

Still, persistently softer macro backdrop and the assessment that the economy is in “modest excess supply” should mean that inflation pressures are much more likely to recede than to reaccelerate – the BoC expected inflation to stay around 3% before gradually easing below that during the second half of this year.

As expected, there was no announcement on the ending of the QT program. Guidance is likely to come in Gravelle’s speech on March 21 about balance sheet normalization.

We’ll look forward to releases of the bank’s quarterly surveys on Canadian businesses and consumers, scheduled ahead of the meeting in April for more forward-looking information on inflation and wage expectations as well as corporate price setting behaviour.

Bottom line: The BoC’s decision to hold the overnight rate steady again in March confirmed that interest rates are already at levels that are high enough to restrict economic activity and further slow price pressure. We expect the BoC to start gradually lowering the policy rate by mid-year, after allowing for clearer signs of easing in core inflation readings to come through.

The Bank of Canada maintained the overnight rate at 5.0%, while stating that it will continue with Quantitative Tightening (QT).

The Bank highlighted the slowing in economic momentum, stating that growth "remained weak and below potential", while emphasizing that "final domestic demand contracted with a large decline in business investment". It also stated that "employment continues to grow more slowly than the population, and there are now some signs that wage pressures may be easing".

On the inflation outlook, the BoC mentioned that inflationary pressures have eased. But in spite of shelter being the driver of overall inflation, it has focused on the fact that "the share of CPI components growing above 3% declined but is still above the historical average". It expects that inflation will "remain close to 3% during the first half of this year".

On the future path of policy, the Bank is still concerned about the "persistence in underlying inflation (and the) Governing Council wants to see further and sustained easing in core inflation."

A press conference is forthcoming at 10:30.

Key Implications

The song remains the same. The BoC came out today to reinforce its view that more time is needed to make sure that inflation is headed to the 2% target. We get it. With core rates of inflation tracking around the mid-3% level, the Bank can justify waiting longer. Luckily the central bank has been gifted a little more time to wait. Economic growth eked out small, but positive, growth to end 2023. With effectively no pressure for the BoC to respond, it can sit back and wait for a couple more inflation reports to roll in.

Markets don't think the BoC can get too comfortable. A June cut is nearly 90% priced, and we agree with that timing. In spite of the economy having avoided recession, consumers are feeling the pain of higher rates. Spending per capita has contracted over the better part of the last 18 months. And it is not as if rate hikes aren't impacting inflation. Sure, the BoC's core measures are still elevated, but they are being driven by shelter prices. Indeed, inflation excluding shelter is running below the BoC's 2% target, at only 1.6% year-on-year. While the BoC isn't ready to adjust course just yet, we think that the time for rate cuts is quickly approaching.

Markets

Yesterday’s risk correction on Wall Street didn’t spill to European dealings with key indices adding up to 0.5%. January EMU retail sales barely grew (0.1% M/M vs 0.2% consensus), but obviously didn’t impact trading ahead of tomorrow’s ECB gathering. Employment indices in US manufacturing ISM last Friday (45.9 from 47.1) and non-manufacturing ISM yesterday (48 from 50.5) suggested the worst for today’s ADP employment report and Friday’s payrolls. Downside risks in any case didn’t materialize today with net job growth clocking at 140k (vs 150k consensus) from a marginally upwardly revised 111k in January. Details showed mainly medium (+69k) and large companies (+61k) responsible for job gains. Sector and regional-wise, job creation was broad-based, led by leisure and hospitality, construction and trade & transportation. Wage growth accelerated for the first time in over a year for job changers (7.6% Y/Y from 7.2% Y/Y) while slowing further for job stayers (5.1% Y/Y from 5.3% Y/Y). Remarks of Fed Chair Powell’s semi-annual testimony before US Congress sounded very familiar. Rate cuts are coming “at some point this year” but “the committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%”. Most Fed members recently closed ranks around December forecasts, suggesting a cumulative 75 bps of rate cuts is still the valid scenario with a first move coming as soon as June. Ahead of rate cuts, the Fed is likely to sort out how the quantitative tightening process will continue in coming months. They want to avoid draining too much liquidity from the system like they did back in 2018. Markets didn’t respond to the outcome. US Treasuries outperform German Bunds in a daily basis, pushing EUR/USD for a test of the upper bound of the broad 1.07-1.09 range in place since mid-January. Higher oil prices can’t help the greenback while the euro doesn’t suffer from French comments that last year’s budget deficit would even be bigger than the upwardly revised 4.9% of GDP.

UK Chancellor Hunt announced that the main national insurance payroll tax will be cut from 10% to 8% as he delivered the annual budget. The ONR also upgraded growth forecast for this year and next from 0.7% to 0.8% and from 1.4% to 1.9% respectively. The UK debt management office separately announced that it will issue £265.3bn of gilts this fiscal year (up from £237bn) with long term bonds making up less of the issuance compared to last year (18.5% vs 21.1%). UK Gilts slightly outperform today, with yields dropping up to 4 bps.

News & Views

The Egyptian pound slumped against the US dollar today. USD/EGP shot up from 30.85 to 50. After the central bank at an unscheduled meeting today jacked up interest rates by a whopping 600 bps to 27.25%, investors felt something else was coming too. Indeed, authorities later announced the long-awaited 35%+ devaluation of EGP. Doing so brought the pound to levels for which it is changing hands on the black market. Egypt is suffering from a severe currency crisis and rampant inflation (30%). It has struck a $3bn deal with the IMF but little of that has been disbursed yet as the Washington-based lender wanted Egypt to take additional crisis measures first. These include tighter monetary policy and a more flexible official exchange rate. Today’s announcement paves the way not only for the IMF loan to be disbursed but also to be increased to more than $10bn. Last month, Cairo also struck a mega $35bn deal with the UAE to develop parts of Egypt’s coast and elsewhere and authorities claimed it as the biggest foreign investment ever. In a sign of investors gaining some confidence back, Egyptian dollar bonds since the UAE deal rallied sharply, pushing double digit yields several percentage points lower.

The European Union is closing in on imposing additional tariffs on imported Chinese electric vehicles. Launching an inquiry into illegal financial support for the industry in October last year, the bloc this week said it has now found “sufficient evidence” of Chinese direct transfers of funds to producers, tax breaks or public provision of goods and services below market prices. It noted a “substantial increase” of Chinese imports in a relatively short period of time, adding that the damage for local EV producers may have started to materialize even before the end of the investigation (which may last no longer than 13 months). For this reason, the EU is taking the appropriate steps to make it possible to collect import duties retroactively should it decide to impose them. Provisional tariffs could be introduced in July with definitive ones in place by November.

USDJPY dips below 150 support and is on track for clear break lower after the pair was hanging above this level for more than two weeks.

Yen gained traction on signals may decide to start raising interest rates, with the most optimistic BOJ policymakers seeing chances for the first hike this month.

On the other hand, the US dollar came under pressure from weaker than expected US Fed ADP private sector payrolls, while prospects for the first Fed rate cut in June remain in play, despite remarks from Fed Chair Powell, who pointed to uncertain economic outlook and still not assured progress towards inflation 2% target.

The US central bank remains very cautious as too early rate cuts that would allow inflation to re-accelerate, but keeping too high interest rates for too long period would hurt economic growth, pointing to balanced approach to the monetary policy in coming months.

Daily close below 150 level (also 20DMA) will generate initial bearish signal, which will look for reinforcement on extension below 149.20 (Feb 29 spike low) and expose first Fibo support at 148.37 (23.6% of 140.25/150.88, reinforced by daily Kijun-sen).

Near-term bias is expected to remain with bears while the price stays below 150 level, while break here and falling 10DMA (150.29) would sideline bears.

Res: 150.00; 150.29; 150.88; 151.43.
Sup: 149.20; 148.80; 148.37; 147.83.

BoC keeps overnight rate unchanged at 5.00% as widely expected. In the prepared remarks for the press conference, Governor Tiff Macklem emphasized that it remains "still too early" for the central bank to contemplate reduction in the policy interest rate.

Governor Macklem recognized that recent inflation figures indicate that the monetary policy is "working largely as expected". However, he also cautioned that the journey towards the inflation target is poised to be "gradual and uneven," with "upside risks to inflation" still in play. The Governing Council is looking for "further and sustained easing in core inflation" before considering any shifts in policy direction.

On the economic growth front, Macklem observed that Canada's performance has been "somewhat stronger than projected," albeit still "weak and below potential." The labor market's gradual easing and expectations for inflation to hover around 3% into mid-year—before a potential decrease in the latter half—were highlighted as key factors in the economic outlook. Additionally, Macklem pointed out that gasoline prices and shelter cost pressures are expected to introduce volatility to inflation rates in the upcoming months.

Full BoC statement and Macklem's remarks.

The Bank of Canada today held its target for the overnight rate at 5%, with the Bank Rate at 5¼% and the deposit rate at 5%. The Bank is continuing its policy of quantitative tightening.

Global economic growth slowed in the fourth quarter. US GDP growth also slowed but remained surprisingly robust and broad-based, with solid contributions from consumption and exports. Euro area economic growth was flat at the end of the year after contracting in the third quarter. Inflation in the United States and the euro area continued to ease. Bond yields have increased since January while corporate credit spreads have narrowed. Equity markets have risen sharply. Global oil prices are slightly higher than what was assumed in the January Monetary Policy Report (MPR).

In Canada, the economy grew in the fourth quarter by more than expected, although the pace remained weak and below potential. Real GDP expanded by 1% after contracting 0.5% in the third quarter. Consumption was up a modest 1%, and final domestic demand contracted with a large decline in business investment. A strong increase in exports boosted growth. Employment continues to grow more slowly than the population, and there are now some signs that wage pressures may be easing. Overall, the data point to an economy in modest excess supply.

CPI inflation eased to 2.9% in January, as goods price inflation moderated further. Shelter price inflation remains elevated and is the biggest contributor to inflation. Underlying inflationary pressures persist: year-over-year and three-month measures of core inflation are in the 3% to 3.5% range, and the share of CPI components growing above 3% declined but is still above the historical average. The Bank continues to expect inflation to remain close to 3% during the first half of this year before gradually easing.

Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank's balance sheet. The Council is still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation. Governing Council wants to see further and sustained easing in core inflation and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour. The Bank remains resolute in its commitment to restoring price stability for Canadians.

Information note

The next scheduled date for announcing the overnight rate target is April 10, 2024. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR at the same time.

Daily Pivots: (S1) 149.66; (P) 150.11; (R1) 150.51; More...

Immediate focus is now on 149.20 support in USD/JPY. Firm break there will suggest that price actions from 150.87 are correcting whole rally from 140.25 at least, with prospect of reversing the whole move. Intraday bias will be back to the downside for channel support (now at 148.69), and then 38.2% retracement of 140.25 to 150.87 at 146.81. Nevertheless, strong bounce from current level will maintain near term bullishness. Break of 150.87 will target 151.89/93 key resistance zone.

In the bigger picture, rise from 140.25 is seen as resuming the trend from 127.20 (2023 low). Decisive break of 151.89/.93 resistance zone will confirm this bullish case and target 61.8% projection of 127.20 to 151.89 from 140.25 at 155.50. However, break of 148.79 resistance turned support will delay this bullish case, and extend the corrective pattern from 151.89 with another falling leg.

Daily Pivots: (S1) 0.8817; (P) 0.8843; (R1) 0.8860; More....

USD/CHF is still bounded in range below 0.8891 and intraday bias stays neutral. Further rally remains in favor as long as 0.8741 support holds. Break of 0.8891 will resume the whole rebound from 0.8332 towards 0.9243 key resistance. Nevertheless, break of 0.8741 support will turn bias back to the downside for deeper pullback.

In the bigger picture, a medium term bottom should be formed at 0.8332, on bullish convergence condition in W MACD, just ahead of 0.8317 long term fibonacci support. It's still early to decide if the larger down trend from 1.0146 (2022 high) is reversing. But further rise should be seen to 0.9243 resistance even as a correction.

Daily Pivots: (S1) 1.2672; (P) 1.2704; (R1) 1.2736; More...

Intraday bias in GBP/USD remains on the upside at this point. Further rally would be seen to 1.2826 resistance first. Firm break there will resume whole rally from 1.2036, and target 61.8% projection of 1.2036 to 1.2826 from 1.2517 at 1.3005 next. For now, further rise will remain in favor as long as 1.2599 support holds, in case of retreat.

In the bigger picture, price actions from 1.3141 medium term top are seen as a corrective pattern to up trend from 1.0351 (2022 low). Rise from 1.2036 is seen as the second leg, which could be still in progress. But upside should be limited by 1.3141 to bring the third leg of the pattern. Meanwhile, break of 1.2517 support will argue that the third leg has already started for 38.2% retracement of 1.0351 (2022 low) to 1.3141 at 1.2075 again.