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Canada's largest bank, RBC, anticipates that the Bank of Canada (BoC) will maintain its current interest rates at the upcoming announcement, aligning with the consensus view. However, RBC emphasizes the significance of closely monitoring the central bank's stance on potential rate cuts. Stronger-than-expected inflation data raises concerns of a repetition of the BoC's previous announcement a year ago, where optimism inadvertently rolled back efforts against inflation, prompting the need for subsequent rate hikes.

Despite the prevailing consensus for a hold on rates, the bank acknowledges the potential market impact of the Governor's statement. RBC anticipates the BoC to exercise caution in declaring victory over inflation too soon, closely watching for indications of how long the current interest rate levels will be maintained. Last January's optimistic tone led to consumer misconceptions and subsequent rate hikes, cautioning against premature declarations regarding the inflation battle.

The economic backdrop in Canada presents a mixed outlook for rate cuts. Progress in combating inflation is countered by a weakening economy, evidenced by falling per-capita GDP, increased unemployment, and slowing consumer demand. RBC notes a decline in total hours worked, potentially influenced by a massive labor strike in Quebec. While there is an expectation for rate relief, the timing remains uncertain, with RBC forecasting the first rate decrease around the middle of the year, followed by additional cuts to reach a 4% overnight rate by the end of 2024. This cautious approach aims to balance the need for economic stimulus with the potential risks associated with inflation and economic instability.

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