The Bank of Canada, or BOC, announced Wednesday it opted to maintain its key overnight rate at five percent, with the Bank Rate at 5.25 percent and the deposit rate at five percent.
The widely anticipated move followed ten rate hikes to curb inflation since early 2022. It raised rates twice to a 22-year high in June and July, then kept them steady for three meetings.
Governor Macklem recently hinted that interest rates may have reached their peak, but it stays ready to raise rates if needed, as inflation remained above target at 3.1 percent in October.
"Governing Council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed," the BOC said in a brief, five-paragraph statement.
The BOC projected inflation to linger around 3.5 percent until mid-2024 before gradually returning to its two percent target by late 2025. It emphasized the need for "further and sustained easing in core inflation" before considering policy adjustments.
Economist Royce Mendes believes the BOC's threats of potential rate increases are primarily a tactic to prevent the market from anticipating imminent rate cuts. He sees this as a cautious approach to avoid premature claims of victory over inflation, despite a shift in messaging from bank officials towards a more dovish tone in recent weeks.
According to Ivey Purchasing Managers Index (PMI) data released on Wednesday, the country's economic activity experienced its strongest growth in seven months during November. The seasonally adjusted index climbed to 54.7 in November, surpassing October's 53.4 and reaching its highest level since April.
The employment gauge increased to 55.3 from October's 54.7, while the prices index climbed to 62.1 from 60.0. In addition, the unadjusted PMI saw a rise to 53.2 from 51.9.
The report is a relief after Canada's economy unexpectedly contracted at an annualized rate of 1.1 percent in the third quarter, following growth of 1.4 percent in the previous quarter. However, Canada's growth is expected to slow in 2024 due to rising shelter costs. This includes faster growth in rent and other housing-related expenses, further fueled by elevated mortgage interest rates.
In a separate report, Canada also recorded a larger-than-expected trade surplus in October of C$2.97 billion ($2.19 billion), in contrast to slumping imports.
Market sentiment now leans towards potential rate cuts starting from March, with expectations of a 25-basis point decrease by April.
CAD projection
Analysts have revised their forecast for the Canadian dollar, projecting less appreciation than previously anticipated as the possibility of rate cuts rises.
A recent survey of 35 foreign exchange experts revealed a median forecast of a 0.4 percent strengthening to 1.3533 per U.S. dollar (73.89 U.S. cents) in three months, down from 1.3450 predicted in a November poll. The expected exchange rate for the Canadian dollar in one year has been adjusted upwards from 1.3000 to 1.3130.
This indicates that analysts are now less optimistic about the Canadian dollar's potential for significant gains soon.
"Our view is the Canadian dollar is going to face a difficult next three months as the data starts to look like the Canadian economy is teetering on the edge of recession if not in a mild recession," said Simon Harvey, head of FX analysis for Monex Europe and Monex Canada.
Following the announcement from the BOC, the Canadian dollar eased 0.10 percent versus its U.S. counterpart to 1.36 per dollar. However, as of writing, it has dropped to 1.358 per dollar.
At the same time, the Canadian two-year yield continued to fall below its U.S. equivalent in recent weeks, reaching 54 basis points, the widest since March. The 10-year bond yields also dropped 3.2 basis points to 3.309 percent, while the similar U.S. yield benchmark fell to 4.142 percent. Lower yields make currencies less attractive to investors.