The Bank of Canada is expected to keep its key interest rate at 2.25 per cent for its fourth announcement in a row on Wednesday amid global economic uncertainty, however it could slowly increase it in 2027, bank economists warn.
Think tank C.D. Howe Institute’s Monetary Policy Council last week urged the central bank to stand pat on its overnight rate until at least October, citing uncertainties of the war in the Mideast and upcoming Canada-United States-Mexico Agreement (CUSMA) talks.
Weakness in the economy and upward pressures on inflation are “creating a stagflationary-type scenario,” council members said, which they also said justified keeping the overnight rate unchanged. They called for a hike to 2.5 per cent by April 2027.
The Monetary Policy Council — whose members include the chief economists of Canada’s Big 6 banks, academic economists, financial market experts and C.D. Howe’s president — acts as a shadow Bank of Canada governing council, making independent assessments of how to achieve a two per cent inflation target.
Steve Ambler, a member of the C.D. Howe council, said any policy rate increase would be seen as a “restrictive monetary policy” in response to last month’s hike in inflation to 2.4 per cent and the economic impact of the war.
“One of the major drivers of (inflation) last month,” said Ambler, was the “war feeding through the gasoline prices.”
Bank of Canada Governor Tiff Macklem said last month the central bank would respond as risks evolve.
“We are prepared to look through the immediate impact of higher energy prices on inflation,” he said, “but we are not going to allow that to spill over and become persistent inflation.”
Financial market odds that the Bank of Canada’s rate will stay at 2.25 per cent were 93.8 per cent as of midday Monday, according to London Stock Exchange Group (LSEG) data shared with the Star, and odds that it will remain at 2.25 in June were at 88.8 per cent.
Royal Bank of Canada economists said last week in their weekly preview that they expect the rate to hold on Wednesday as there appears to be “limited urgency” for an adjustment in the near-term, pointing to a “modest pickup” in GDP momentum, and a stabilized labour market.
The RBC economists are forecasting rates will gradually increase starting next year “as the economy continues to normalize.”
They added that policymakers will be paying close attention to the impact of higher energy prices on inflation, but that there is nothing the central bank’s interest rate policy can do to influence the global price of oil.
“We expect the BoC will be cautious about adding to near-term affordability challenges created by a supply-driven surge in fuel costs,” they wrote, “as long as inflation expectations and broader inflation pressures (outside of energy price increases) remain contained.”
Derek Holt, Scotiabank’s head of capital markets economics, wrote in a report on Friday that the bank expects the interest rate would hold, adding the announcement would likely have “stronger warnings on the implication of an inflation shock,” to the policy rate’s path.
He wrote that “no explicit guidance is likely, but the policy rate bias is likely to sound like it leans in a more hawkish sounding direction.”
