Focusing on economic resilience: Canada's Economy Skirts Recession, Bank of Canada Maintains Rates

Economists anticipate that the Bank of Canada (BoC) will maintain its key overnight rate at 5 percent during Wednesday's announcement, despite recent data indicating a slight easing in inflation and sluggish economic growth. Although inflation has persistently remained above the BoC's 2 percent target for three years, and despite the key rates being at a 22-year high, Canada's economy has managed to avoid recession and may be showing signs of recovery. Pedro Antunes, chief economist at the Conference Board of Canada, noted, "The bank (BoC) has been quite cautious, and we don't expect to see a rate cut until around June or July."

Inflation figures for January dipped to 2.9 percent, falling within the BoC's target range of 1-3 percent, but Antunes stated that this alone is unlikely to prompt a rate cut at this time. The central bank's decision on the overnight rate target will be announced at 1445 GMT (0945 local time). The BoC has maintained rates at their current level in the past four meetings.

Following the January inflation data, the financial markets have slightly increased their expectations for a rate cut. Currently, there is a 44 percent probability of a cut as early as April, with a full pricing in of a rate cut by June. However, most economists surveyed by Reuters anticipate a rate cut in June, although there is a risk that this could be delayed. Recent GDP figures for the fourth quarter showed stronger-than-expected growth, driven by exports.

Manufacturing activity in Canada reached its highest level in 10 months in February, although it was still in contraction territory according to recent data. Philip Petursson, Chief Investment Strategist at IG Wealth Management, mentioned that April remains a possibility for a rate cut, but June seems more likely.

The BoC has previously expressed concerns about underlying inflationary pressures, particularly in areas such as mortgage and rental costs, wages, and food prices. Despite the impact of higher rates on cooling inflation, which has decreased from 8.1 percent in June 2022, the BoC expects it will take until the second half of next year to reach the 2 percent target.

In summary, while some expect a slightly more dovish tone from the BoC, emphasizing that rate cuts are not imminent, the overall sentiment suggests a cautious approach to monetary policy adjustments.

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