The Bank of Canada (BoC) set its key overnight rate at 5% on Wednesday and in the meantime said underlying inflation remained a concern. The bank's focus now shifts to when to reduce borrowing costs.
The BoC's governing committee has kept rates on hold at four consecutive policy meetings after raising in July. Annual inflation in December rose to 3.4%, still higher than the central bank's 2% target but below the peak of 8.1% in June 2022.
"The Governing Committee's discussion of monetary policy has shifted from whether our policy rate is sufficient to maintain price stability to how long it should remain at current levels," Governor Tiff Macklem said in a speech.
Currency markets were expecting a 25 basis point cut in June after holding off on bets on a cut in April after December's annual inflation data was released.
The BoC dropped language included in its previous policy statement that said it was "ready to raise policy rates if necessary." However, in his opening remarks to reporters, Macklem said the bank was not ruling out another rate hike.
"If new developments push inflation higher, we may still need to raise rates," Macklem said. "If the economy moves broadly in line with the projections we published today, I expect the next discussion will be about how long we keep the policy rate at 5%," he said.
The BoC cut its growth outlook and was slightly more optimistic about when inflation would return to its 2% target, based on new forecasts also published on Wednesday.
The BoC saw weak growth in the first quarter and then a gradual pick-up. Inflation is expected to be around 3% throughout the first half of 2024, easing to 2.5% in the second half, and returning to target in 2025.
