Key facts
- The Bank of Canada is expected to hold its benchmark interest rate at 2.25% on Wednesday.
- Canada's annual headline inflation exceeded the 3% upper target in May, largely due to gasoline prices.
- Economic growth has been uneven, with a technical recession in Q1 followed by a rebound in April.
- Economists and money markets anticipate no change in interest rates through at least July next year.
- The BoC will release its quarterly Monetary Policy Report alongside the rate decision.
The Bank of Canada is widely expected to maintain its benchmark interest rate at 2.25% on Wednesday, as conflicting economic signals of elevated inflation and subdued growth leave policymakers with little reason to adjust monetary policy.
Canada's annual inflation rate surpassed the central bank's 3% upper target in May for the first time in nearly two and a half years. However, this rise was primarily attributed to gasoline prices, which have since decreased, suggesting the inflationary pressure may be temporary. Economic growth has also been inconsistent, with the economy experiencing a technical recession at the end of March before rebounding in April, indicating a lack of demand that would necessitate further monetary stimulus.
Randall Bartlett, senior director of Canadian Economics at Desjardins Group, noted that despite high oil prices earlier in the year, there has been no significant pass-through into underlying inflation. He also highlighted uncertainty surrounding trade policy and the future of the North American Free Trade Agreement as factors weighing on business investment and hiring.
Given that inflation remains above the target while economic growth is sluggish, economists believe the argument for keeping interest rates unchanged is stronger than for either a hike or a cut. The current policy rate of 2.25% is considered to be at the lower end of the bank's estimated neutral range, providing moderate support to the economy without exacerbating inflation.
All 36 economists surveyed by Reuters anticipate the Bank of Canada will hold rates steady, with a majority forecasting no change until at least July of the following year. Money markets are also fully pricing in a hold decision for Wednesday and see minimal probability of a rate move before the end of the year, a significant shift from early last month when a 25-basis-point increase was priced in.
The Bank of Canada's quarterly Monetary Policy Report, which is expected to include revised growth and inflation forecasts for the year, will accompany the rate decision. The announcement is scheduled for 9:45 a.m. ET, followed by a press conference with Governor Tiff Macklem and Senior Deputy Governor Carolyn Rogers.