'It's still too early': Bank of Canada holds benchmark rate, reiterates risk to inflation outlook

The Bank of Canada said on Wednesday "it's still too early" to ease monetary policy as it held its benchmark interest rate at 5 per cent, a move widely expected by economists even as it makes progress on tamping down inflation.

The decision marks the fifth consecutive time that the central bank has held its key rate at 5 per cent.  

"It’s still too early to consider lowering the policy interest rate," Bank of Canada Governor Tiff Macklem said in his prepared opening statement.

"Recent inflation data suggest monetary policy is working largely as expected. But future progress on inflation is expected to be gradual and uneven, and upside risks to inflation remain. Governing Council needs to see further and sustained easing in core inflation."

While progress has been made on slowing inflation, the central bank flagged in a statement released alongside its decision that "underlying inflationary pressures persist." It highlighted that measures of core inflation are still in the 3 to 3.5 per cent range, and that the share of components in the Consumer Price Index that are growing above 3 per cent declined, but remains above the historical average.

"The Bank of Canada has slammed the door shut on the April cut here," Kyle Chapman, FX markets analyst at Ballinger Group, said in a statement.

"If anything, the statement read more hawkish than last month, and the repeated reference to a slow and uneven path to 2 per cent indicates to us that there are real concerns in the Governing Council about the persistence of inflationary pressures."

Inflation in January slowed more than economists expected, with prices rising 2.9 per cent annually, within the Bank of Canada’s target range of between one and three per cent. The central bank’s core measures of inflation also slowed in January, but the bank said it needs to see "further and sustained easing in core inflation."

Shortly after the rate announcement, data showed that Canadian money markets now see a 23 per cent chance of a rate cut in April, down from 43 per cent. They have also pushed back bets for a fully priced-in cut to July, from June.

The central bank has resisted laying out timing for any rate cuts, but Macklem said that the bank was "not going to be lowering rates at the pace we raised them." When asked about what the central bank wants to see in core inflation, Macklem said the it needs to "see some consistency across the board."

"One month doesn't make a trend. You need to see a few months," Macklem said.

"We're looking at a whole range of indicators... The more that are pointing in the same direction, the more confident you become that yes, those underlying inflationary pressures really are easing off."

Desjardins senior director of Canadian economics Randall Bartlett said in a research note on Wednesday that while there was "softening" in the Bank's tone on the margins, it continued to emphasize that underlying price pressures persist.

"Taken together, while the Bank of Canada may not have been prepared to fully commit to rate cuts at this meeting, by recognizing the progress made, it is setting the stage for cuts to come," Bartlett wrote.

"We continue to be of the view that the Bank will begin cutting interest rates at its June meeting."

CIBC chief economist Avery Shenfeld wrote in a research note on Wednesday that "today was judged as too soon to make a move."

"It wouldn't be the Bank's style to hint today about a rate cut as far off as June, so we'll stick with our call for a rate cut that month despite the lack of fresh dovish talk today," Shenfeld said.

"Clearly, we'll need more progress on inflation, and perhaps on wages, for that outcome, so we'll be watching the upcoming jobs and CPI data as we fine-tune our forecasts."

With files from Reuters

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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