With inflation holding firm and the deadline for trade deals approaching, most economists expect the Bank of Canada will leave its policy interest rate unchanged in its decision on Wednesday.
The central bank has held the rate at 2.75 per cent for two consecutive meetings — at the midpoint of its neutral range, where monetary policy is neither stimulating nor hindering the economy, economists say.
The rate is expected to stay unchanged this week as the bank waits to see whether Canada could secure a trade deal and avoid the 35 per cent U.S. tariffs expected to hit Aug. 1.
“I think (the Bank) will just keep the cards close to the chest, see what happens,” said Michael Gregory, deputy chief economist at BMO. “And then, come September, the next meeting, then act if they want to.”
As of Friday afternoon, financial markets were placing odds of a quarter-point rate cut on Wednesday at just seven per cent, according to LSEG Data & Analytics.
Statistics Canada reported earlier this month that Canada unexpectedly added 83,000 jobs in June, and the unemployment rate fell for the first time since January.
But Gregory said the overall trend in the job market is still cooling, with no notable wage growth and an unemployment rate higher than a year ago.
The annual pace of inflation accelerated to 1.9 per cent in June, while the Bank of Canada’s closely watched core inflation metrics held at around three per cent — “a little on the high side for the bank,” Gregory said.
“Overall, sticky inflation readings, a weakening but relatively resilient economic backdrop, and prospects for larger fiscal spending are reasons why we do not expect the BoC will cut again in this cycle,” RBC economists Claire Fan and Abbey Xu wrote in a note Friday.
Despite the consensus among economists for a rate hold this week, views diverge on a possible interest rate cut in the fall.
Tony Stillo, director of Canada Economics at Oxford Economics, said he believes the bank’s rate-cutting cycle for this year is over, as Canada is expected to rely more on fiscal policy measures to address what he estimates will be an economic contraction in the second and third quarters if a trade deal isn’t reached.
“We don’t expect them to lower, even with a downturn, because at the same time, inflation is going up, prices are going up, and that’s the kind of dilemma that it puts the Bank of Canada in,” said Stillo.
Royce Mendes, managing director at Desjardins Capital Markets, said he believes the inflationary impact of tariffs has already been factored into the economy and the bank “probably wants to see a little bit more data” to come to that conclusion.
“I think they could open the door, potentially cutting again in September,” Mendes said. “so they might point out that … we have more clarity likely of what the relationship with the U.S. will be.”
Gregory said the Bank of Canada will likely see signs of a pullback in core inflation and further economic weakness, which could make it more inclined to cut rates.
He added that BMO expects two more rate cuts later this year and another in 2026 — or a few months later in the cycle — as the central bank may want to tap the gas pedal to “get the Canadian economy over the hump and adjust to the reality.”
With files from The Canadian Press
