The Bank of Canada left interest rates unchanged for a second straight meeting and pushed back against market expectations for a cut later this year.

Policymakers led by Governor Tiff Macklem held the overnight lending rate at 4.5 per cent on Wednesday, in line with the expectations in a Bloomberg survey of economists. Central bankers upgraded their outlook and said recent data are “reinforcing” their confidence that inflation pressures will abate, while keeping the door open to additional hikes should the economy surprise to the upside.

“Governing Council continues to assess whether monetary policy is sufficiently restrictive to relieve price pressures and remains prepared to raise the policy rate further if needed to return inflation to the 2 per cent target,” the bank said.

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The loonie rallied to its highest since April 5 and bonds slumped, with the yield on the two-year benchmark note rising to 3.82 per cent at 1:35 p.m. in Ottawa. It had briefly traded below 3.7 per cent earlier Wednesday.

The rate statement suggests policymakers are comfortable waiting for more data before making any further changes to their monetary policy stance. Macklem and his officials said that tighter credit conditions — made worse by recent instability in the global banking sector — are now expected to restrain growth in the U.S. and Europe.

“The Bank of Canada’s current motto is ‘don’t just do something, sit there,’ and patience should indeed be a virtue in getting inflation down to target without inflicting more pain on the economy than necessary,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said in a report to investors. “By including a warning that a further hike could still be required if the economy remains too heated, they are still far from being in line with market hopes for a rate cut later this year.”

Speaking to reporters after the decision, Macklem said governing council discussed the likelihood of rates staying in restrictive territory for a longer period of time in order to bring inflation to heel. He also poured cold water trader bets for rate cuts ahead, saying “that doesn’t look today like the most likely scenario to us.”

While the central bank acknowledged that output was much stronger than projected in the first quarter, policymakers see that momentum ending soon, as the aggressive rate hikes of the past year bite. Growth will be “weak” for the rest of 2023, implying that the economy will have excess supply in the second half. The Bank of Canada said it still sees inflation returning to near its target by the end of 2024 — but also acknowledged risks to that outlook.

“Getting inflation the rest of the way back to 2 per cent could prove to be more difficult because inflation expectations are coming down slowly, service price inflation and wage growth remain elevated, and corporate pricing behavior has yet to normalize,” the bank said. Policymakers will be “particularly focused” on these indicators, as well as core inflation.

A new batch of forecasts point to economic output coming in stronger than previously expected, with firmer consumption pushing yearly growth in gross domestic product to 1.4 per cent from 1.0 per cent. That’s largely due to a surprisingly robust 2.3 per cent annualized expansion in the first quarter, from 0.5 per cent projected in January’s monetary policy report. Growth in 2024 was revised to 1.3 per cent, from 1.8 per cent previously.

The monetary policy report also focused on strong population gains from immigration, which mean “the economy may be able to grow at a somewhat faster pace than previously expected without generating additional inflationary pressures,” the bank said.

Although the jobs market is still tight, the labor force is expanding quickly due to the influx of newcomers, which more than offsets the drag from an aging population, officials said. Population growth is also boosting consumption, especially in the near term, and lifting the potential growth rate.

Nevertheless, the bank expects consumer spending to be subdued beginning in the second half of the year and into 2024 as the effects of monetary tightening hit the economy harder. The share of income spent on interest payments will continue to rise as homeowners renew their mortgages at higher rates, officials said.

The bank didn’t change its estimate of the neutral rate of interest, which it says is between 2 per cent to 3 per cent, the same as a year-ago assessment.

Just after the central bank’s March meeting, Silicon Valley Bank and Signature Bank collapsed in the US, which was soon followed by an emergency sale of Credit Suisse to UBS. The financial turmoil has stirred talk of global recession, changing expectations for how much further the Federal Reserve will lift rates.

The bank flagged a sharp global slowdown on broader financial-sector stress as the biggest downside risk to its outlook, which would have significant domestic spillover. “Rising unemployment could also interact with high household debt and housing vulnerabilities, amplifying the economic downturn in Canada,” officials said in the monetary policy report.