The Bank of Canada left its policy rate unchanged on Wednesday as expected in the face of rising inflation and once again it reiterated that it will be looking through the Iran war's immediate consumer price index impact, said National Bank of Canada.
While the BoC still stands ready to respond if energy inflation spreads and becomes persistent, it's easy enough to see that this is not its base case outlook, noted the bank. The BoC's updated projections saw all-items inflation revised up non-trivially by three ticks for 2026 as a whole, but Canada's central bank marked down its 2026 projection of core inflation relative to January.
The BoC was forced to mark-to-market its near-term growth projections to reflect the Q4 2025 miss and Q1 2026 tracking softer than earlier expected.
However, the BoC continues to expect a pick-up in growth despite multiple sources of ongoing uncertainty.
Policymakers may have been comforted by what was a constructive Q1 Business Outlook Survey (BOS), which indicated growing optimism, at least before the Iran war, added National Bank.
The BoC's growth path is consistent with eventual rate hikes, though the timing remains uncertain. The current OIS-implied rate path, implying a hike or two by year-end, is far more realistic than the more than 75 bps of 2026 tightening that were briefly priced last month, pointed out the bank.
However, while a Q4 hike is plausible, National Bank continues to expect the BoC to wait until 2027 before starting to move back toward a neutral 2.75%.
Overall, Wednesday's hold was a largely-as-expected rate decision. The BoC will remain comfortably on the sidelines for now, but its base case outlook is consistent with eventual hikes, not cuts, according to the bank.
The BoC's next policy decision will take place on June 10.