As the Bank of Canada maintained its benchmark rate as anticipated today, the focus swiftly shifted to the release of yet another scorching inflation report from the U.S.
In March, U.S. CPI inflation stood at 0.4%, mirroring the robust figures witnessed in February and contributing to the upward trajectory of headline inflation throughout the year. With an annualized inflation rate of 3.5%, surpassing expectations, bond yields surged and equity markets experienced a sell-off.
The significance of these developments lies in their implications for the Federal Reserve and, consequently, the future monetary policy decisions of the Bank of Canada.
BMO’s Scott Anderson remarked, “The March CPI inflation report serves as a stark reminder to the markets that the Fed’s battle against inflation is far from concluded.”
This could potentially delay rate cuts until later this year, or even until next year, according to Derek Holt of Scotiabank. He suggested, “Could we be looking at a scenario where rate cuts are off the table for 2024? That’s a real possibility,” highlighting the swift reaction of the markets, which significantly reduced the probability of a June rate cut by the Fed.
“The markets are currently factoring in, at most, a cumulative half percentage point rate cut by the end of the year,” he added. “Moreover, the Bank of Canada is now less inclined to adopt a dovish stance, given the risk of destabilizing the Canadian dollar as the Fed’s trajectory shifts downwards.”
