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National Bank to Focus on Bank of Canada Policy Decision, Merchandise Trade Data This Week

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In Canada this week, the main event will be the Bank of Canada's monetary policy meeting on Wednesday, said National Bank of Canada.

The BoC is widely expected to leave its policy rate unchanged at 2.25%, marking the fifth consecutive hold, and the third since the onset of the Mideast conflict, noted the bank.

Though oil prices have retreated from their peak, they remain elevated with global supply chains disrupted. This keeps inflation risks skewed to the upside, stated National Bank.

"Fortunately," non-energy inflation has been well-contained so far, which will allow policymakers to continue to look through the Iran war's immediate impact on inflation, pointed out the bank. In April, the BoC warned that persistently high oil prices could ultimately lead to rate hikes and it's likely to keep this possibility on the table.

However, the BoC will also need to acknowledge ongoing/growing weakness in the Canadian economy and labor market. This should limit second-round inflation effects, reducing the need for near-term policy restraint.

All told, National Bank expects the BoC to maintain two-sided rate guidance -- while implicitly placing more weight on the upside inflation scenario -- and continue to see policymakers sidelined through 2026. There will be no updated projections presented at Wednesday's meeting, but Governor Tiff Macklem will lead a post-decision press conference as usual.

The bank will also be keeping an eye on the release of April building permit data on Thursday and Q1 capacity utilization figures on Friday.

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