Bank of Canada expected to hold key interest rate this morning, even as the economy shows underlying signs of weakness

Yahoo

3 days ago

The Bank of Canada is widely expected to hold its key interest rate steady at its announcement at 9:45 a.m. ET today. Twenty of 26 economists polled by Reuters said they expect Canada's central bank to hold.
Many have noted April's higher-than-expected core inflation figures and gross domestic product (GDP) data published last Friday showing the economy growing faster than forecast.
'Arguments for a rate cut still remain,' RBC economists Nathan Janzen and Abbey Xu wrote on Tuesday, noting weak employment, with manufacturing jobs down 30,600 in April, a stagnant housing market and underlying signs in the GDP release that the economy has slowed. RBC nonetheless expects the Bank of Canada (BoC) to hold as it watches for further signs of economic weakness, and possible government stimulus measures.
In a Monday note, BMO economist Priscilla Thiagamoorthy pointed to the BoC's stated focus on 'price stability' — a phrase used frequently in the Bank's April announcement. 'With underlying price pressures remaining uncomfortably high, we are expecting the BoC to keep policy rates unchanged in June,' she wrote.
Prior to the April decision, the BoC had issued seven consecutive cuts to its benchmark rate, starting in June 2024, to bring its policy rate to its current level of 2.75 per cent.
Follow Yahoo Finance Canada's live blog for news, updates and analysis of the Bank of Canada's interest rate announcement below.
The BoC's April statement and governor Tiff Macklem's opening remarks stressed 'price stability' as a recurring theme. 'We will support economic growth while ensuring inflation remains well controlled,' Macklem said. But the path forward on those objectives was complicated by April inflation data, in which the Bank's preferred measures, CPI-median and CPI-trim — core measures that filter out indirect tax effects — jumped more than expected.
Headline inflation dropped, with the removal of the carbon tax. The trade war's impact showed up in the April inflation data, with prices for groceries and vehicles climbing. The core figures, each back above three per cent, returned to a pace last seen before the BoC began cutting interest rates, noted BMO chief economist Douglas Porter.
"Signs of renewed weakening in the economy on one hand, as shown by the latest employment data, but stronger core inflation on the other, makes for a tough decision," wrote CIBC economist Andrew Grantham.
The Bank of Canada should step off the sidelines with a rate cut today, say economists pointing to factors including a deceptive inflation reading and weak jobs data in April.
The BoC is widely expected to hold its rate steady at 2.75 per cent. Three-quarters of economists in a recent poll by Reuters say they expect a second straight pause.
Desjardins chief economist Jimmy Jean is the minority arguing for a cut.
"Indecisiveness comes at the expense of responsiveness. A June cut, by contrast, would allow the Bank to get ahead of a downturn at a time when upside tail inflation risks have diminished," he wrote in a recent report.
"In other words, if Macklem still takes the lags of monetary policy seriously, this is the moment for him to take the lead."
Jean notes Macklem's "slightly hawkish" tone in interviews after the recent G7 Summit in Alberta.
He says April's cooler inflation print was the catalyst that turned markets against a June cut, despite rising core measures favoured by the central bank.
"The Bank of Canada should probably disregard the noise currently affecting its core CPI measures," Jean wrote.
The C.D. Howe Institute's Monetary Policy Council is also calling for the BoC to lower its policy rate today. The think tank says six out of nine members at its recent meeting favoured a cut.
"The general assessment was that trade uncertainty is undermining confidence everywhere, and is a material negative for Canadian consumption and investment," C.D. Howe wrote last week.
"Several participants emphasized weak job numbers, particularly recent payroll employment reports and job losses in the prime age group, as decisive indicators that demand is flagging and a disinflationary output gap is opening up," the think tank added.
"Others noted that looking through the impact of the elimination of the consumer carbon tax on the total CPI, various measures of underlying inflation were above two per cent and, in many cases, rising."
Stephen Brown, deputy chief North America economist for Capital Economics, says shrinking domestic demand within the April GDP figures reinforces his view that the Bank will cut rates today.
Extreme trade uncertainty, stronger-than-expected GDP growth, and incoming fiscal stimulus are among the reasons economists are calling for the Bank of Canada to hold its policy rate today.
The BoC is widely expected to keep its rate steady at 2.75 per cent. Three-quarters of economists in a recent poll by Reuters say they expect a second straight pause.
"We're entering a fresh set of unknowns by way of how the Trump administration could handle its response to a federal court's ruling against the use of IEEPA tariffs," Scotiabank chief economist Derek Holt wrote in a recent report, referring to the ongoing legal battle over the U.S. president's authority.
"The BoC's next forecasts are due on July 30, and that may be a more suitable moment for re-evaluating uncertainty," he added. "It would also take us past whatever may happen around the July 9 expiration of the delayed U.S. tariffs on the EU and closer to the expiration of the 90-day suspension of more punitive tariffs on China by mid-August."
Holt also notes the BoC has never cut its benchmark policy rate before when the most recent core inflation data are as high as they are today.
Turning back to the trade war, BMO chief economist Doug Porter says "the great tariff inflation scare seems to be everywhere except in the data."
"All of this adds up to a less pressing need for monetary policy to support the economy," he wrote in a report.
"There's little debate that the heavy trade clouds will linger, but there is a growing sense that markets and the economy can deal with that uncertainty better than initially expected."
RBC economists Nathan Janzen and Abbey Xu say today's decision will be another close call for the BoC. However, they ultimately see policymakers opting to pause.
"The BoC has already cut rates by 225 basis points over the past year—more than other central banks," they wrote in a report.
"It still has room for further cuts if economic conditions weaken, but will need to consider any government spending support measures, which are better suited to provide targeted, timely, and temporary assistance to affected sectors than interest rate cuts."
Prime Minister Mark Carney has promised his government will pass an income-tax cut by Canada Day.
"Fiscal stimulus is coming, and the BoC may be leery towards combining additional monetary stimulus, given the recent history of overdoing it on both counts," Holt wrote.
The BoC's April statement and governor Tiff Macklem's opening remarks stressed 'price stability' as a recurring theme. 'We will support economic growth while ensuring inflation remains well controlled,' Macklem said. But the path forward on those objectives was complicated by April inflation data, in which the Bank's preferred measures, CPI-median and CPI-trim — core measures that filter out indirect tax effects — jumped more than expected.
Headline inflation dropped, with the removal of the carbon tax. The trade war's impact showed up in the April inflation data, with prices for groceries and vehicles climbing. The core figures, each back above three per cent, returned to a pace last seen before the BoC began cutting interest rates, noted BMO chief economist Douglas Porter.
"Signs of renewed weakening in the economy on one hand, as shown by the latest employment data, but stronger core inflation on the other, makes for a tough decision," wrote CIBC economist Andrew Grantham.
The Bank of Canada should step off the sidelines with a rate cut today, say economists pointing to factors including a deceptive inflation reading and weak jobs data in April.
The BoC is widely expected to hold its rate steady at 2.75 per cent. Three-quarters of economists in a recent poll by Reuters say they expect a second straight pause.
Desjardins chief economist Jimmy Jean is the minority arguing for a cut.
"Indecisiveness comes at the expense of responsiveness. A June cut, by contrast, would allow the Bank to get ahead of a downturn at a time when upside tail inflation risks have diminished," he wrote in a recent report.
"In other words, if Macklem still takes the lags of monetary policy seriously, this is the moment for him to take the lead."
Jean notes Macklem's "slightly hawkish" tone in interviews after the recent G7 Summit in Alberta.
He says April's cooler inflation print was the catalyst that turned markets against a June cut, despite rising core measures favoured by the central bank.
"The Bank of Canada should probably disregard the noise currently affecting its core CPI measures," Jean wrote.
The C.D. Howe Institute's Monetary Policy Council is also calling for the BoC to lower its policy rate today. The think tank says six out of nine members at its recent meeting favoured a cut.
"The general assessment was that trade uncertainty is undermining confidence everywhere, and is a material negative for Canadian consumption and investment," C.D. Howe wrote last week.
"Several participants emphasized weak job numbers, particularly recent payroll employment reports and job losses in the prime age group, as decisive indicators that demand is flagging and a disinflationary output gap is opening up," the think tank added.
"Others noted that looking through the impact of the elimination of the consumer carbon tax on the total CPI, various measures of underlying inflation were above two per cent and, in many cases, rising."
Stephen Brown, deputy chief North America economist for Capital Economics, says shrinking domestic demand within the April GDP figures reinforces his view that the Bank will cut rates today.
Extreme trade uncertainty, stronger-than-expected GDP growth, and incoming fiscal stimulus are among the reasons economists are calling for the Bank of Canada to hold its policy rate today.
The BoC is widely expected to keep its rate steady at 2.75 per cent. Three-quarters of economists in a recent poll by Reuters say they expect a second straight pause.
"We're entering a fresh set of unknowns by way of how the Trump administration could handle its response to a federal court's ruling against the use of IEEPA tariffs," Scotiabank chief economist Derek Holt wrote in a recent report, referring to the ongoing legal battle over the U.S. president's authority.
"The BoC's next forecasts are due on July 30, and that may be a more suitable moment for re-evaluating uncertainty," he added. "It would also take us past whatever may happen around the July 9 expiration of the delayed U.S. tariffs on the EU and closer to the expiration of the 90-day suspension of more punitive tariffs on China by mid-August."
Holt also notes the BoC has never cut its benchmark policy rate before when the most recent core inflation data are as high as they are today.
Turning back to the trade war, BMO chief economist Doug Porter says "the great tariff inflation scare seems to be everywhere except in the data."
"All of this adds up to a less pressing need for monetary policy to support the economy," he wrote in a report.
"There's little debate that the heavy trade clouds will linger, but there is a growing sense that markets and the economy can deal with that uncertainty better than initially expected."
RBC economists Nathan Janzen and Abbey Xu say today's decision will be another close call for the BoC. However, they ultimately see policymakers opting to pause.
"The BoC has already cut rates by 225 basis points over the past year—more than other central banks," they wrote in a report.
"It still has room for further cuts if economic conditions weaken, but will need to consider any government spending support measures, which are better suited to provide targeted, timely, and temporary assistance to affected sectors than interest rate cuts."
Prime Minister Mark Carney has promised his government will pass an income-tax cut by Canada Day.
"Fiscal stimulus is coming, and the BoC may be leery towards combining additional monetary stimulus, given the recent history of overdoing it on both counts," Holt wrote.