MNI BOC WATCH: Competing Growth, CPI Risk Keep Macklem Holding

Canada's central bank is seen keeping its policy interest rate at 2.25% Wednesday on a continuing mix of economic slack and inflation expectations that have held firm through the Iran conflict. 

All 27 economists surveyed by MNI see Governor Tiff Macklem holding the rate where it's been since October, which he views as the low end of the neutral range. Macklem at the June 10 decision signaled he could hike multiple times if high energy prices turn into broader inflation or cut if there are big new U.S. tariffs.

Macklem could well repeat his musing to reporters last time that little had changed among the balance of risks. Donald Trump on July 1 declined to renew the USMCA trade deal to set up another year of tariff negotiations and the frayed Iran ceasefire has left oil prices elevated but below records set after the conflict began in February.

Wednesday's decision comes with a new quarterly economic forecast and perhaps minor changes to the April view for 2026 GDP growth of 1.2% this yea and inflation of 2.3%. That combination creates what officials call a dilemma where any hike or cut brings risks of either letting inflation climb further or weakening an economy that stalled in the first quarter. 

READY TO BE NIMBLE

Macklem will benefit from continuing to tilt his remarks towards multiple hikes versus a cut to keep inflation expectations in check and avoid a repeat of the burst of prices after Covid lockups, former officials have told MNI. (See: MNI INTERVIEW: Pre-Emptive BOC Talk Beats Moves-Ex Deputy Lane)

Economists predict the Bank will hike twice in the first half of next year while investors see some chance of an increase late this year. Even with heavy tariffs on steel, aluminum and autos Canada's energy firms benefit from higher prices, while consumer and increased military spending are also seen adding to a rebound. (See: MNI INTERVIEW: Trade Delays BOC Hike Until Late 2027-Stillo)

As for the Bank's mandate of keeping inflation at 2%, core indexes have faded to about that mark in recent months while headline prices quickened to 3.2% in May from a year ago. Officials see CPI holding around 3% in coming months before easing back to target. 

Asked last time if the growth or inflation risk is bigger, Macklem quipped "both" and added what policy comes next “is less about the timeline, and more about the conditions.” The Bank's June decision said so far there's little evidence of pass-through but officials won't allow inflation to become widespread or entrenched and policy may need to be "nimble."