The Bank of Canada, Ottawa. Image reproduced under CC licensing conditions

The Bank of Canada (BoC) inched closer towards a pivot in monetary policy after it welcomed a recent fall in inflation and declared the economy had reached an equilibrium in supply and demand.

December's policy decision and guidance prompted markets to bring forward the timing of Canada's first rate cut after the BoC said the slowdown in the economy is reducing inflationary pressures in a broadening range of goods and services prices, culminating in October's 3.1% inflation reading.

Crucially, it noted demand in the economy had fallen enough to cool inflation more sustainably: "data and indicators for the fourth quarter suggest the economy is no longer in excess demand," said the Bank in a statement. The previous statement said the economy was "approaching balance."

"As with other central banks, investors have become increasingly confident about the chance of a rate cut in recent weeks, and a 25bp cut is now fully priced in by the April meeting," says Henry Allen, a strategist at Deutsche Bank.

"The Bank of Canada toasted some small victories against inflation in announcing its easy decision to keep rates on hold," says Avery Shenfeld, an economist at CIBC.

The Bank cites its hard work on raising interest rates for diminishing demand and reaching this state of equilibrium in supply and demand that will act to bring inflation rates lower.

The Bank nevertheless warns it is too soon to declare victory on inflation, particularly given the upside pressures to inflation posed by rising rentals.

"The Bank maintained a de facto hiking bias by promising to deliver further hikes if needed. Admittedly, the statement also concedes that the economy is “no longer in excess demand”, which clearly waters down the nature of this threat," says Taylor Schleich, an analyst at National Bank of Canada

"We weren't expecting a definitive declaration of victory at this point," says Shenfield. "It wasn’t yet willing to drop its warning that it could raise rates again if needed, which would definitively mark a turning point."

Yet, financial market pricing suggests investors see that a turning point is coming closer, and rate cuts are now anticipated from the Bank of Canada starting in March or April 2024.

"It’s clear to us that the Bank won’t have to hike further (and they probably don’t think they’ll have to either) but they are also clearly not comfortable ushering in bets on earlier and more aggressive easing with inflation pressures not fully under control," says Schleich.