The Bank of Canada kept its key interest rate unchanged at a near 23-year high of 5% on Wednesday but the bank's head said a cut in June was possible if a recent cooling trend in inflation is sustained.
The comment by Governor Tiff Macklem was the firmest hint yet from the central bank about a possible timeline for cuts. Rates have been at 5% since July 2023.
In its quarterly Monetary Policy Report, also released on Wednesday, the bank hiked its growth forecast for 2024 on the back of strong immigration flows and increased household spending.
Traders dialed back their expectations for the first 25-basis-point rate cut in June to 56%, from 84% before the announcement. A rate cut in July is fully priced in after slipping below 100% for sometime after the rates decision.
Asked at a news conference whether a June rate cut was within the realm of possibilities, Macklem said "Yes".
The Canadian dollar pared earlier gains after the decision, trading down 0.80% at 1.3675 to the U.S. dollar, or 73.13 U.S. cents.
Inflation has been falling in recent months but at 2.8%, it is still above the bank's 2% target. The bank said higher gasoline prices would keep it at around 3% in the second quarter before it gradually drops to 2% by the end of 2025.
"We just need to see it for longer to be confident that we are clearly on a path to 2% inflation and when we are at that point it will be appropriate to reduce our interest rate," Macklem told reporters.
Macklem had previously indicated the central bank could start cutting this year.
"The BoC has got what it wanted, and now it wants to see more," said Kyle Chapman, FX markets analyst at Ballinger Group.
"They perhaps did not deliver on the more dovish expectations that some had expected, but this doesn't necessarily shut the door on a June cut," he said in a note before Macklem talked about a possible June cut.
Economists and analysts have forecast that the BoC will lead the U.S. Federal Reserve in rate cuts as economic data in both countries have been diverging.
U.S. consumer prices increased more than expected in March by 0.4% after advancing by the same margin in February, pushing back hopes of a Fed rate cut further into the second half.
Macklem said he did not see a big impact from U.S. inflation on Canada.
"With the Fed seemingly on hold for potentially longer after a string of firm CPIs, the BoC will likely be a bit more cautious on the margin with rate cut timing," said Benjamin Reitzes, managing director, Canadian rates and macro strategist, at BMO Capital Markets.
The bank said growth in 2024 would be 1.5%, up from the 0.8% it projected in January. It said the economy would expand by 2.2% in 2025, down from the 2.4% expected earlier.
On an annualised basis, the bank said the economy had grown by 1.0% in the third quarter of 2023, up from the previous forecast of no growth, and had jumped by 2.8% in the fourth quarter, far more than the 0.5% forecast.
"Strong population growth is increasing consumer demand as well as the supply of workers, and spending by households is forecast to recover through the year," said Macklem.
The elevated interest rate is helping fuel a housing crisis and shelter price inflation remains elevated, putting more pressure on the government of Prime Minister Justin Trudeau.
The central bank has increased borrowing costs by 475 basis points in a space of 17 months to 5% and held them at that level since July last year.
"Sustained downward momentum in core inflation within the next CPI print will be key in determining whether the process can start at the next meeting in June," Andrew Grantham, senior economist at CIBC, wrote in a note.
The next rate announcement will be released on June 5.
