Wednesday's Bank of Canada hold on rates was widely expected, but the focus was always going to be on how the bank's Governing Council would describe the evolving risks, said National Bank of Canada.
In April, markets seized on Governor Tiff Macklem's "consecutive" rate hikes threat in the scenario where oil prices remain elevated and higher energy prices lead to higher generalized inflation, noted the bank.
Despite a steady dose of mostly soft inter-meeting economic and inflation data, the BoC is continuing to warn that tighter policy may be needed, stated National Bank. However, the shock of explicitly stating this has worn off and bond yields edged down moderately after the dust on the decision settled.
Beyond the shock of "consecutive hikes" wearing off, tightening risks are being moderated by the BoC's acknowledgement of ongoing excess supply and their downplaying of May's hiring surge, pointed out the bank.
Comfort can also be taken from policymakers again stating that there are limited signs of broader inflation pass-through from higher energy prices. However, the BoC was forced to acknowledge that oil price expectations are higher than they were six weeks ago, meaning a bit more all-items inflation than it had previously anticipated.
Overall, the decision played out largely in line with National Bank's expectations, but there was perhaps a slight dovish bias stemming from the BoC's discussion of the economy. Indeed, there appeared to be more of a focus on current excess capacity and less emphasis on its previously communicated expectation that this slack would be absorbed.
In any case, the BoC believes that, for now, holding rates steady is the best way to balance both upside and downside risks to the outlook, the bank added.
Like markets, National Bank views 2026 policy risks as skewed towards tightening and it doesn't doubt the BoC's resolve in ensuring price stability. However, the bank judged that the near-term hike scenario is growing less likely and it still expects the BoC to remain sidelined through year-end.