The Bank of Canada is widely expected to keep the policy rate unchanged at 2.25% tomorrow. The central bank will likely maintain a cautious stance and a “wait and see” approach amid sluggish economy and inflationary risks stemming from US-Iran war.
The BoC will also release new economic forecasts which are expected to mirror the other central banks’ outlooks, with upward revision for inflation and downward revision for growth.
Recent data has been strongly supporting a neutral stance. While a weak labor market and sluggish growth would normally argue for further rate cuts to stimulate activity, the risk of a secondary inflation wave has been keeping the BoC on the sidelines.
Central banks typically look through volatile energy prices, but the concern for the BoC will be whether these costs seep into broader inflation expectations and higher wage growth. The risks for the Canadian economy do not stop with the US-Iran war though as there’s still uncertainty around the upcoming CUSMA renegotiations.
All in all, tomorrow’s decision is unlikely to bring much volatility as the central bank will likely stress data-dependency and avoid pre-committing to any rate path.
The market is pricing in a rate hike in the fourth quarter of 2026, so traders will focus on any change in tone and communication that could point to an earlier than expected rate hike or a strong pushback against market’s pricing
