The Bank of Canada is widely expected to leave interest rates unchanged at 9:45 a.m. ET on Wednesday and Bank of Montreal (BMO) is comfortable with the view that the BoC will be on hold through 2026, barring a material change in the growth and/or inflation backdrop.
Canada's central bank is also scheduled to hold a press conference at 10:30 a.m. ET on Wednesday.
On the growth front, recent data have held up well, with Q1 real gross domestic product growth tracking at 1.5% annualized, before an expected cooldown to 1.0% for Q2. Consumer spending is sturdy and fiscal stimulus is supportive, but job growth has stagnated while business investment and housing are subdued. Indeed, that is all consistent with an economy still running below potential, and consistent with risks that, in the BoC's words as of March 18, "look tilted to the downside," noted the bank.
The BoC was expecting 1.8% growth for Q1 in the most recent Monetary Policy Report (MPR), and BMO looks for this update to introduce Q2 around the bank's call. The prior edition also called for 1.1% growth in 2026, which is about in line with BMO's current 1.0% forecast.
Interestingly, inflation data have been favorable in recent months for a central bank that is likely to look beyond the temporary jump in gasoline prices and scrub out several tax changes currently working through the system, pointed out BMO. Core inflation trends have ebbed to the low-2% range from a year ago as of March, and all four major measures (median, trim, CPIX and excluding food & energy) saw three-month annualized rates at 2% or lower.
Absent the conflict in Iran, this would kick the door open for a central bank that was considering easing. Yet, the market continues to price in tightening later in 2026. The bank believes that has probably gone too far, and it would likely require at least three months of evidence that core inflation is moving higher in the short term, and evidence that inflation pressure is broadening -- as of March, both of those were becoming more favorable.
Wednesday's version of the MPR will also update estimates for potential growth and the neutral rate, added BMO. Potential growth has been carved down by sharp reductions in population and labor force growth, while trade uncertainty has kept a lid on productivity growth. Those factors should keep potential growth in the low-1% range for this year and 2027.
Meantime, the BoC is unlikely to shift its assessment of the neutral range, currently pegged at 2.25%-to-3.25%, leaving the current 2.25% policy rate right at the low end of that range. The bank generally sees some downside risk to that assessment given domestic factors, or mainly the stall in labor force growth, but the BoC notes that global rates, especially in the United States, influence neutral levels in Canada -- and the FOMC's long-run median assessment has actually ticked up from a year ago.
The province of Newfoundland & Labrador will table later Wednesday its FY26/27 in an environment of high oil prices, according to BMO.