The Bank of Canada held rates steady at 2.25% on Wednesday, as expected, said Bank of Montreal (BMO).
The policy statement held to the facts, highlighting the uncertainty around the outlook for oil prices and trade, noted the bank. The economy is performing largely as expected, with growth rebounding after the Q4 contraction.
The labor market remains soft. The BoC views higher oil prices as more or less neutral for growth. The inflation commentary highlights the decelerating core metrics, but notes that Canada's central bank will be watching for signs of pass-through from higher energy prices.
The BoC will look through higher headline inflation for now, but will not let that become persistent inflation, stated BMO.
The Monetary Policy Report forecast saw minor changes to the growth outlook. Q1 gross domestic product growth was trimmed a few ticks to 1.5%, while Q2 was introduced at 1.5%, though BMO is more cautious at 1.0%. That puts 2026 at 1.2%, actually up a tick from the January MPR forecast.
Inflation projection changes were small as well, with Q4 2026 headline at 2.2% from 1.9%, while the core consumer price index was actually cut to 2.0% from 2.1%.
The neutral range was held steady at 2.25%-to-3.25%. Potential growth was trimmed a tick for this year and 2027 to 1.2% and 1.3%, respectively, though the level was lifted due largely to historical GDP revisions. That suggests the output gap will be little changed through the rest of this year at -1.5% to -0.5%, and then narrow somewhat in 2027 as growth picks up to an above-potential pace, added the bank.
There remains a huge number of unknowns for the outlook, with oil and trade looming largest. Until there is more clarity, the BoC is likely to stay on hold, according to BMO.
However, it's apparent that policymakers want to push back on any second-round inflation effects, so CPI data over the next few months will be watched closely if energy prices don't retreat.