Bank of Canada expected to hold policy rate as bar to cut is ‘quite high'

Calgary Herald

2 days ago

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Economists expect the Bank of Canada to maintain its cautious approach by holding its policy rate in place on Wednesday as it continues to assess the impact of U.S. President Donald Trump's trade war on the Canadian economy.
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'We expect them to be on hold again at the June meeting,' said Jason Daw, head of North American rate strategy at the Royal Bank of Canada. 'Given that they went on hold at the April meeting, the bar for them to cut again would be quite high, and the data that we've had in the interim has been mixed and not really sending them a signal to do anything at this time.'
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Canada's central bank remains in a tight spot, as it weighs the upside risks to inflation against the downside risks to growth brought on by U.S. tariffs. Daw said the market is putting the likelihood of a policy rate cut on Wednesday at just 25 per cent and has only priced in one-and-a-half cuts for the remainder of the year. The Bank of Canada's policy rate currently sits at 2.75 per cent, after it paused for the first time at its April meeting, following seven consecutive cuts.
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In April, core measures of inflation ran above three per cent and GDP for the first quarter came in better than expected, at an annual rate of 2.2 per cent, higher than the 1.8 per cent Bank of Canada forecast.
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While the headline number was positive, much of the growth was driven by exports and inventory building, as businesses raced to get ahead of Trump's tariff announcements at the beginning of the year. Under the surface, final domestic demand was flat and residential investment contracted. A flash estimate for April by Statistics Canada showed the economy grew at a monthly rate of 0.1 per cent.
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Desjardins Group chief economist Jimmy Jean said he disagrees with the market assessment and still expects a rate cut on Wednesday. Jean said the Bank of Canada should be looking through the strong headline GDP number and focus its attention on underlying weaknesses in the economy, including the flat household spending and final domestic demand, in addition to the weakness in the Canadian housing market. Desjardins is forecasting the economy will begin to contract in the second quarter of this year.
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'To me this is almost a no-brainer that they should cut and look through those very fleeting influences,' Jean said.
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Data in April also showed a deterioration in the labour market brought on by the trade war. The unemployment rate rose to 6.9 per cent during the month, as employment in the manufacturing sector fell by 31,000 due to tariff uncertainty. Economists expect the jobless rate to peak above seven per cent this year.