The Bank of Canada is set to leave its overnight target unchanged at 2.25% on Wednesday, a decision widely expected by forecasters, said National Bank of Canada.
This would mark the fifth consecutive hold after policymakers first declared in October that policy is at "about the right level" to keep inflation near target and support the economy's transition, noted the bank.
After the April decision, OIS markets discounted more than 50bps of BoC tightening in 2026, stated National Bank. Weak economic and inflation data inter-meeting saw roughly half of this stripped out.
The bank doesn't expect rate expectations to be pared much further after the decision. Wednesday's statement should reiterate that the central bank is still looking through the Iran war's immediate impact on inflation.
The BoC will also keep both hikes and cuts on the table. However, it's the upside inflation/rate hike scenario that will, at least implicitly, be advanced as the more pressing risk, National Bank pointed out.
Both policy decisions since the onset of the Middle East war produced Canadian rate selloffs and underperformance versus United States Treasuries, added the bank.
The statement will acknowledge weaker-than-expected gross domestic product growth, though Governor Tiff Macklem will be sure to stress this isn't a recession. The BoC will also point to an expected growth rebound in Q2. Despite strong job gains in May, it will reiterate that the labor market is "soft," according to National Bank.
Despite the surge in gasoline prices, recent inflation data has been encouraging as underlying price pressures continue to cool. The BoC should again acknowledge that there's little evidence of energy prices feeding through into inflation more broadly.
However, the BoC will again stress that it's watching this carefully and that the risk of broadening rises the longer oil prices remain elevated.