The Bank of Canada held its key overnight interest rate at 5% Wednesday amid continuing concerns about persistent underlying inflation.

But BoC officials have shifted their tone on possible rate hikes. Tiff Macklem, the BoC’s governor, indicated that rate cuts are a matter of when, not if.

“With overall demand in the economy no longer running ahead of supply, Governing Council’s discussion of monetary policy is shifting from whether our policy rate is restrictive enough to restore price stability, to how long it needs to stay at the current level,” Macklem told reporters in Ottawa following the decision.

The widely expected hold comes after the inflation rate rose to 3.4% in December. Inflation had held steady at 3.1% in November and October.

Analysts had warned that the inflation increase would spoil the market’s hopes of early interest rate reductions. Some lenders have already started to offer mortgages at rates below 5%.

The BoC has sought to bring inflation to closer to 2% before introducing interest rate cuts. Many analysts have predicted that the BoC will introduce reductions in the second half of 2024.

But Macklem did not offer any hints on the timing of cuts.

“I think it’s important that we don’t give Canadians a false sense of precision,” Mr. Macklem said. “We’re going to have to see how inflation evolves.”

In a note to clients, CIBC Chief Economist Avery Shenfeld said the BoC’s softer tone on hikes marked a “dovish tilt” that reinforces the likelihood of a rate cut in the first half of 2024.

“The timing of the first cut can come well before we see a 2%inflation rate if, as we expect, by mid-year most of [the] gap between actual inflation and the bank’s target lies in the shelter component,” Shenfeld wrote, according to the Globe.

”So an April cut, while not our base case, would be on the table if growth or inflation come in weaker than we expect.”

CIBC Deputy Chief Economist Benjamin Tal has cited high shelter expenses, particularly mortgage cost increases, as a primary contributor to inflation.