Bank of Canada to Hold Rates Steady as Middle East Tensions Fuel Global Inflation Worries
The Bank of Canada is broadly expected to keep its key interest rate at 2.25 per cent on Wednesday as tensions in the Middle East rise while the economy has been treading water.
A consensus of nine economists recently polled by the C.D. Howe Institute said that policymakers should maintain the rate at its current level until January 2027, with possible rate hikes to come next year.
And, as of early afternoon on Monday, financial markets were roughly pricing in 90 per cent odds of a rate hold on Wednesday, according to data supplied by the London Stock Exchange Group.
TD economist Maria Solovieva agrees that the bank will likely stay on the sidelines this week.
“If you think of the (economic) outlook since June’s meeting, not a lot of things have changed since then,” she said in an interview. “So neither a cut nor a hike look very urgent.”
While Canada’s annual inflation rate jumped above the central bank’s target range in May, the bank’s preferred “core” measures of inflation — which strip out volatility — have been steady, supporting the case for another rate hold.
“Pass-through from oil prices to other consumer prices has been extremely limited,” Royce Mendes, head of macro strategy at Desjardins, wrote in a note to clients.
“Even another spike in crude would likely be taken in stride” by the central bank, he added.
Still, inflationary pressures remain. On Monday, U.S. President Donald Trump said he would reinstate a blockade in the Strait of Hormuz and impose a 20 per cent charge on cargo. Following the news, the price of Brent crude oil hit $80 (U.S.) per barrel, according to Bloomberg.
While inflation has been generally contained, recent data have been pointing to an economic recovery after a weak start to the year spurred discussions around a technical recession.
The unemployment rate unexpectedly dropped to 6.5 per cent while the economy eked out 18,000 jobs in June, Statistics Canada said Friday.
“This economy is not collapsing completely,” said TD’s Solovieva. But it is experiencing weak growth, she added, and “definitely going through a lot of changes on a structural basis.”
Those changes include the fact that the Canada-United States-Mexico Agreement (CUSMA) was not renewed on July 1.
Despite the ongoing trade uncertainty between Canada and the U.S., Solovieva noted that business investment has picked up recently, meaning that companies are managing to put their tariff-related anxiety aside and make decisions.
Following the stronger-than-expected data, RBC economists changed their forecast for GDP growth in the second quarter to 2.2 per cent from 1.7 per cent.
“Overall, we see less risk of higher or lower interest rates in the near term, as growth picks up while oil-related inflation concerns ease,” RBC economist Claire Fan wrote in a note published online Monday.
The Bank of Canada is scheduled to make its fifth interest rate announcement of the year at 9:45 a.m. Eastern Time on Wednesday.
It will be followed by a live press conference hosted by governor Tiff Macklem and senior deputy governor Carolyn Rogers.
This article was first reported by The Star
