OTTAWA, April 10 (Reuters) - The Bank of Canada (BoC) kept its key interest rate unchanged at a near 23-year high of 5% on Wednesday and ruled out a cut until it sees more signs that a recent drop in inflation will be sustained.
In its quarterly Monetary Policy Report, the bank also hiked its growth forecast for 2024 on the back of strong immigration flows and increased household spending.
Traders quickly dialed back their expectations for the timing of the next rate cut. Before the announcement they saw an 84% chance of it coming in June but that fell to around 40%.
Markets had earlier fully priced in a cut by July but that slipped to September. The Canadian dollar pared earlier gains after the decision, trading down 0.73% at 1.36690 to the U.S. dollar, or 73.16 U.S. cents.
"The BoC has got what it wanted, and now it wants to see more," said Kyle Chapman, FX markets analyst at Ballinger Group.
"They perhaps did not deliver on the more dovish expectations that some had expected, but this doesn’t necessarily shut the door on a June cut," he said.
Inflation has been falling in recent months but at 2.8%, it is still above the bank's 2% target. The bank said higher gasoline prices would keep it at around 3% in the second quarter before it gradually drops to 2% by the end of 2025.
Governor Tiff Macklem had previously indicated the central bank could start cutting this year but on Wednesday he gave no sense of a timeline.
"The data since January have increased our confidence that inflation will continue to come down gradually even as economic activity strengthens," he told reporters in opening remarks.
"What do we need to see to be convinced it's time to cut? The short answer is we are seeing what we need to see, but we need to see it for longer to be confident that progress towards price stability will be sustained."
Economists and analysts have forecast that the BoC will lead the U.S. Federal Reserve in rate cuts as economic data in both countries have been diverging.
U.S. consumer prices increased more than expected in March by 0.4% after advancing by the same margin in February, pushing back hopes of a Fed rate cut further into the second half.
The bank said growth in 2024 would be 1.5%, up from the 0.8% it projected in January. It said the economy would expand by 2.2% in 2025, down from the 2.4% expected earlier.
On an annualised basis, the bank said the economy had grown by 1.0% in the third quarter of 2023, up from the previous forecast of no growth, and had jumped by 2.8% in the fourth quarter, far more than the 0.5% forecast.
"Strong population growth is increasing consumer demand as well as the supply of workers, and spending by households is forecast to recover through the year," said Macklem.
The elevated interest rate is helping fuel a housing crisis and shelter price inflation remains elevated, putting more pressure on the government of Prime Minister Justin Trudeau.
The central bank has increased borrowing costs by 475 basis points in a space of 17 months to 5% and held them at that level since July last year.
"Sustained downward momentum in core inflation within the next CPI print will be key in determining whether the process can start at the next meeting in June," Andrew Grantham, senior economist at CIBC, wrote in a note.
Analysts have raised concerns that lowering interest rates too soon could bring droves of homebuyers back into the market spiking inflation.
"We don't want to leave monetary policy this restrictive longer than we need to," Macklem said. "But if we lower our policy interest rate too early or cut too fast, we could jeopardize the progress we've made bringing inflation down."
The next rate announcement will be released on June 5.
Reporting by Promit Mukherjee and David Ljunggren; Additional reporting by Rod Nickel in Winnipeg and Fergal Smith in Toronto; editing by Jonathan Oatis
