By Promit Mukherjee
OTTAWA (Reuters) - The Bank of Canada (BoC) is expected to keep its overnight rate on hold on Wednesday when it also releases new inflation and growth forecasts that should provide insight into the central bank's view on when borrowing costs may begin to ease.
The BoC governing council has held rates steady at three consecutive policy meetings after last hiking in July to a 22-year high of 5.0%. Annual inflation in December was 3.4%, still higher than the central bank's 2% target but below a peak of 8.1% in June 2022.
"There's no denying there's been progress on bringing inflation lower; however, it's also clear that there's still plenty of work to do in order to get back to 2%," Benjamin Reitzes, managing director and macro strategist at BMO Capital Markets, said in a note.
"Rate cuts are very likely in 2024, but the Bank of Canada is going to remain as patient as possible for inflation and inflation expectations to retreat further," he added.
The rate decision will be announced 15 minutes earlier than has been custom, at 9:45 am ET (1445 GMT), when updated economic forecasts in the Monetary Policy Report (MPR) will also be released.
Money markets are expecting a cut of 25 basis points in June after having pushed back bets for a cut in April following the release of December inflation data, which rose from November.
The BoC will hold rates on Wednesday and at its next meeting in March, according to a Reuters poll of 34 economists. In the same survey, 12 analysts forecast that the first rate cut since March 2020 would come in April, while about two-thirds expect one in June or later.
While inflation has been sticky, economic growth has been sluggish, and some economists warn that interest rates are going to have to start coming down soon to head off a more severe downturn.
In the third quarter of last year, the economy contracted, and the BoC's quarterly business survey showed that firms have fewer orders than a year ago. An increasing number of firms expect a recession over the next 12 months.
The BoC, in its last round of forecasting in October, said it expects inflation to return to the 2% target by the end of 2025 and forecast 0.8% annualized growth in both the third and fourth quarters of last year.
"It's time for the Bank of Canada to drop the explicit threat of higher interest rates and replace it with a statement about keeping policy restrictive for as long as necessary," Royce Mendes, head of macro strategy, said in a note. "The possibility of recession is very real."
As it held rates steady, the BoC has so far kept language in its policy announcements saying it is "prepared to raise the policy rate further if needed."