The central banks take centre stage

• The Bank of Canada kept rates steady at 5%.
• U.S. inflation's unexpected rise altered expectations around U.S. Federal Reserve rate cuts.
• The European Central Bank held rates high, signalling a continued restrictive approach, despite market speculation.

The Bank of Canada (BoC) decided to keep its interest rates the same for the sixth meeting in a row, although it hinted it was inching closer to cutting rates. It used the U.S. Federal Reserve’s (the Fed) argument, saying there is a need for more solid evidence that inflation is really cooling down before it makes a move. It left the benchmark overnight rate at 5%, which didn't really surprise anyone who was paying attention to market predictions. BoC Governor Macklem put it this way: "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." Economists are now eyeing the BoC's next meeting on June 5, predicting that it might be ready to cut rates then. The betting odds among traders for a 25-basis-point reduction are pretty high, more than two-thirds in fact. And by July, they're even anticipating possibly two cuts. Canada's journey with inflation is starting to look different from that in the U.S., where there have been unexpected jumps in inflation in January and February.

Speaking of the U.S., after five consecutive months of the headline Consumer Price Index (CPI) ticking up, everyone was thinking it might slow down a bit in March, from a 0.4% month-over-month increase to a 0.3% increase. But that didn't happen. Instead, inflation went up by a hotter-than-expected 0.4% month-over-month, matching the highest increase since August 2023, and pushing the annual rate up to 3.5%. The main culprits? The costs of shelter and gasoline, which together accounted for more than half of the monthly increase across all items. This inflation news pushed the yield curve to its most inverted state since December 2023. As a result, the market's expectations for Fed rate cuts — and when those cuts might happen — have drastically changed in the last three weeks. From expecting three cuts, now there's just one on the table, with a 50% chance of a second. And a June cut has been completely ruled out.

After this U.S. CPI announcement, which significantly shifted expectations for the Fed’s future policy moves, all eyes were on the European Central Bank (ECB). But there weren't any surprises there. The ECB decided to keep its rates at record highs for the fifth consecutive meeting. It did add a new line to its statement, though: "The Governing Council’s future decisions will ensure that its policy rates will stay sufficiently restrictive for as long as necessary..." With the dramatic shift in expectations for the Fed, people were curious to see if the ECB would signal that June might be when they start cutting rates. But it turned out to be a non-event, with the focus remaining on the ECB's next moves.

Listen to this week’s podcast for further insights.