The Bank of Canada (BoC) has held steady on its hawkish stance, according to analysts' reports on Wednesday. The central bank's decision to maintain its current position was expected by markets, with the Royal Bank of Canada (TSX:RY) (RBC) noting that the BoC continues to be highly data-dependent and won't hesitate to push interest rates higher if necessary to return inflation to the 2% target rate.
Despite a recent slowdown in headline Consumer Price Index (CPI), the BoC's preferred core measure remains persistently above the 2% target. RBC analysts also noted that wage growth is still high and oil prices have been rising in recent weeks. These factors could lead to an increase in inflation in the near term.
However, RBC forecasts that the recent soft-patch in economic data will continue, and predicts that the overnight rate will hold where it is through the end of this year. The analysts pointed out that current interest rates are at a level the BoC sees as restrictive, enough to put downward pressure on economic growth and inflation pressures over time. They also noted that the impacts of previous hikes are still building.
Jimmy Jean, Chief Economist at Desjardins Group, shared his insights on the BoC's decision. He mentioned that while the bank recognizes that inflation is likely to increase shortly, they remain probably dissatisfied with how inflation has been evolving. Jean added that the language used by the BoC suggests they're not close to cutting interest rates and that the balance of risk is still to the upside.
Jean also underlined that the central bank wants to avoid another run-up in real estate and consumption as seen in Q1, thus maintaining their hawkish stance. However, he expressed doubt about whether they will execute on this threat, given consumer reactions to interest rates' impact.
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