As expected, the Bank of Canada held its key interest rate steady on Wednesday, but future rate cuts could be in doubt due to higher than expected US inflation numbers south of the border.The bank kept its overnight rate steady at 5% for the sixth month in a row, despite encouraging economic signs that it could soon begin easing them. Although inflation fell to 2.8% in February — closing in on the bank’s 2% to 3% target range — bank Governor Tiff Macklem said he expects it to climb back above 3% due to higher gasoline prices before easing off to 2.5% by the end of the year."What do we need to see to be convinced it’s time to cut? The short answer is we are seeing what we need to see, but we need to see it for longer to be confident that progress toward price stability will be sustained," Macklem said."The further decline we’ve seen in core inflation is very recent. We need to be assured this is not just a temporary dip.".But his hands may be tied by hotter than expected inflation numbers south of the border, which on Wednesday rose to 3.8% in March or nearly half a percentage point. The US is also trying to stick to a 2% target.Those results cast doubt on whether the US Federal Reserve will start cutting borrowing costs later this year, if at all.That will have a direct impact on Canadian borrowing charges because interest rates on this side of the border to support the value of the Canadian Loonie vis-a-vis the US Greenback.If the bank starts cutting rates too early it could have a detrimental impact on the value of the Canadian dollar which many economists say contributes to higher inflation.Meanwhile, the Canadian economy expanded at its fastest rate for a year in January, with GDP growth ticking up to 0.6% and all but torpedoing the prospect of an April rate cut.Still, the national jobless rate jumped to 6.1% in March, the largest month-over-month increase in the unemployment rate since mid-2022, as the economy shed 2,200 jobs which translates into lower wage pressures.Business investment is projected to recover gradually after considerable weakness in the second half of last year. The bank expects exports to continue to grow “solidly” through 2024..Overall, the bank forecasts GDP growth of 1.5% in 2024, 2.2% in 2025 and 1.9% in 2026. The strengthening economy will gradually absorb excess supply through 2025 and into 2026.Still, economists at RBC said they are still expecting rate cuts starting in June.“Resilience in early-2024 GDP data gives the BoC time to hold the line on interest rates for a little longer, but with most other economic data showing signs of softening, our base case assumption is that the BoC will be in a position to shift to cuts around mid-year,” said Assistant Chief Economist Nathan Janzen.James Laird, the co-CEO of Ratehub.ca said it could still take longer to materialize, although he didn’t think the latest developments would have much impact on house prices.“The timing of rate cuts has certainly not moved up based on the announcement from the bank today,” he said.“Anyone with a variable rate or HELOC will need to continue to be patient with the progress towards conditions appropriate for a rate cut.”
