The Bank of Canada is widely expected to keep its key interest rate unchanged on Wednesday — but this week’s announcement might offer some insight into where interest rates are heading.
While financial markets are pricing in a rate hike by the end of the year, many economists expect the bank to stand pat until 2027. Observers will be monitoring governor Tiff Macklem’s tone closely for clues as he communicates the decision.
It’s been tough to forecast the path for rates, TD Bank economist Andrew Hencic told the Star, especially during a period of high economic uncertainty.
“We think that the conditions won’t necessarily be there for a rate hike later this year,” he said, adding that he expects energy prices to fall in the coming months with an eventual resolution to the conflict in the Middle East.
The central bank’s goal is to use the policy rate to control inflation without hurting economic growth too much. At least for now, most experts agree that the bank will want to wait for more economic data to be released before moving the policy rate.
“The surge in oil prices has sent inflation back above the central bank’s two per cent target,” RBC economists Nathan Janzen and Abbey Xu wrote in a note to clients on Friday.
“But, there is nothing the (Bank of Canada) can do about global oil prices, and there’s little evidence so far that higher energy prices are filtering into broader measures of underlying inflation.”
Janzen and Xu expect the bank’s next move to be a hike, but not until next year and if growth and the labour market improve.
At the same time, the trajectory for economic growth is murky.
Though the Canadian economy is officially in a technical recession — characterized by two consecutive quarters of declining Gross Domestic Product (GDP) — Bank of Canada senior deputy governor Carolyn Rogers has already cautioned against putting a lot of weight on GDP data alone.
Recently, labour market numbers for the month of May also showed that the economy is on stronger footing than the first-quarter GDP report might have suggested.
However, lingering questions around the renewal of Canada-United States-Mexico Agreement (CUSMA) remain a downside threat to the economy.
“A negative CUSMA outcome is the single greatest risk to the Canadian economy,” Royce Mendes, head of macro strategy at Desjardins, said in a note to clients on Friday.
“It’s very likely that the U.S., Canada and Mexico won’t agree to a 16-year extension of the deal by the July 1 deadline,” he added. “Should the CUSMA negotiations fall apart, Canadian central bankers will need to respond with lower rates.”
With many questions still unanswered, financial market odds for Wednesday’s announcement were just over 96 per cent in predicting a rate hold, according to data supplied by the London Stock Exchange Group on Monday.
The Bank of Canada is scheduled to announce the overnight rate target at 9:45 a.m. on Wednesday, followed by a press conference hosted by Macklem and Rogers at 10:30 a.m.
