USD/CAD remains bearish after BoC decision, US inflation data

The Canadian dollar traded higher today as investors sold the USD broadly following weaker-than-expected inflation numbers.

BoC stays pat; rates kept unchanged

At its April policy meeting, the Bank of Canada (BoC) announced that the benchmark interest rate would remain at 4.5%. All 33 economists Reuters surveyed believed the bank would maintain its overnight rate. Inflation has been trending downward, reaching 5.2% in February after reaching an all-time high of 8.1% in January, but it is still well above the bank’s 2.0% target.

“The Bank expects CPI inflation to fall quickly to around 3% by the middle of this year and then more gradually to the target of 2% by the end of 2024,” it said in a statement, attributing the sluggish decline to services prices and wage growth.

Previously, the Bank of Canada had been less specific about when inflation would reach its target, stating that it would occur sometime in 2024. In addition, the Bank of Canada increased its growth forecast for this year from 1.0% in January to 1.4%.

The bank reduced its projection for economic growth for 2024 from 1.8% in January to 1.3% and predicted that the country’s economy was going to grow by 2.5% in 2025. It also estimated that the nominal neutral interest rate was between 2% and 3%, which was unchanged from its estimation in April 2022.

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Moreover, the BoC stated that the Governing Council would continue to evaluate whether monetary policy is sufficiently restrictive, adding that they remain willing to raise rates if necessary. Lastly, the Bank of Canada acknowledged that credit conditions had tightened in the United States and Europe as a result of recent bank failures but stated that the situation was improving.

“We still look for the Bank to remain at 4.50% for all of 2023, as we do expect growth to slow markedly in Q2. That said, if the expected softening in the labour market does not emerge, the BoC may have little choice but to tighten again. With markets likely to give the BoC a pass in June, we see more risk for rate hikes in the July and September meetings.” Analysts at TD Securities said after the decision.

US inflation slows further

According to the most recent data released by the Bureau of Labor Statistics on Wednesday morning, consumer prices rose at the weakest rate since May 2021, as inflation showed further evidence of easing in March.

In March, the Consumer Price Index (CPI) revealed that headline inflation increased 0.1% over the previous month and 5.0% from a year earlier, a decrease from February’s 0.4% month-over-month increase and 6% annual gain.

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Bloomberg data indicates that both measures were marginally better than the 0.2% month-over-month increase and 5.1% annual increase predicted by economists.

The inflation increase of 5% represents the weakest annual increase in consumer prices since May 2021, but it is still substantially above the Federal Reserve’s 2% target. As a result, the Fed has been increasing interest rates to combat inflation, but the central bank risks triggering a recession by increasing rates too rapidly.