Bank of Canada to keep rates on hold as stubborn inflation delays cut

By Promit Mukherjee

OTTAWA (Reuters) - The Bank of Canada is expected to leave its key overnight rate unchanged at its meeting on Wednesday, but stubborn inflation has markets delaying the timeline for the first rate cut in almost four years.

After the previous three months showed prices declining or flat versus a year ago, headline inflation picked up in December, accelerating to 3.4% from 3.1% and the closely-watched core inflation data also surprised on the upside.

That prompted money markets to push back their bets. Money markets are now unanimous on a 25-basis-point cut by June, while expectations of a similar-sized cut in April has now dropped to 70% from 100% before the December inflation data.

"Before the most recent inflation print, I think pretty much every ingredient was in line to get a rate cut," said Jules Boudreau, senior economist with Mackenzie Investments.

But the recent jump in inflation "throws out of the window any chance of getting a rate cut" this week and it is very unlikely even in March, he said.

Boudreau sees the first, quarter-point cut in April, later than he had previously forecast.

Economists have said that inflation in Canada is going to remain stickier than the U.S. and the BoC will trail the Federal Reserve when it comes to the first rate cut this year.

All 34 economists in a Reuters poll expect the Bank of Canada (BoC) to hold its key overnight rate at a 22-year high of 5% both on Wednesday and at its next meeting in March, while 12 see an April reduction and about two-thirds see the first rate cut since March of 2020 coming in June or later.

The BoC will announce the rate decision at 9:45 am ET (1445 GMT) on Wednesday, bringing forward its release time by 15 minutes starting January. It will also release the quarterly Monetary Policy Report, which will include new forecasts, and markets will closely watch Governor Tiff Macklem's comments on the rate trajectory.

In October, the BoC said it expected inflation to return to the 2% target by end-2025, and forecast 0.8% annualized growth in both the third- and fourth-quarters of last year.

The BoC ratcheted up its overnight rate with a series of 10 rate hikes between March of 2022 and July of last year to tame inflation. Headline inflation has slowed from a high of 8.1% in June 2022, but it remains above the 2% mark that the central bank targets.

The BoC's December core inflation measures, CPI-trim and CPI-median, showed underlying inflation has yet to be fully reined in. The three-month annualized rate of the two spiked to 3.6% from an upwardly revised 2.9% in November, according to Royce Mendes, head of macro strategy for Desjardins Group.

Resilient shelter costs, which account for almost a third of the consumer price inflation basket, and persistent wage growth of 4-5% are making inflation even more stickier in Canada.

Concerns about an economic slump are growing.

Canada's economy shrank an annualized 1.1% in the third quarter of 2023 and fourth quarter figures are due out on Jan. 31.

"The personal strain to the average person is greater in Canada than the U.S... So Tiff Macklem's job, in the end, is going to be more difficult," said Brooke Thackray, research analyst with Horizons ETFs.

($1 = 1.3492 Canadian dollars)

(Reporting by Promit Mukherjee; editing by Steve Scherer and Deepa Babington)