MNI BOC WATCH: Hold Seen As Only Option As Economy Stabilizes

The Bank of Canada is seen keeping its policy interest rate at the low end of its neutral range Wednesday to wrap a year where it cut four times to cushion the shock of the biggest tariff war with the United States since the 1930s, and was still able to see inflation stabilize at target.

All 23 economists surveyed by MNI see the overnight target remaining 2.25% in a decision at 9:45am EST, the first unanimous poll in recent memory. Governor Tiff Macklem's Oct. 29 cut of 25bps came with the message that unless the economy has a wild swing, he has done enough to tackle U.S. tariffs as high as 50% and keep inflation around 2%.

Jobs and GDP since then have grown faster than expected but hardly enough to make up losses coming from the biggest year-to-date trade deficit on record that is hurting business investment. Prime Minister Mark Carney has signaled he and Donald Trump won't engage on saving a North American trade deal until next year and the U.S. President has suggested he may walk away from such a bargain.

Those risks will leave slack in the economy in 2026 when the Bank sees growth around 1%, modest enough to slow core inflation rates stuck around 3%. The job market has moved into better balance, with unemployment easing from the highest in a decade outside the pandemic earlier this year.  A report Friday showed the biggest jobless rate decline in two decades excluding the covid period.

“Three consecutive months of relatively positive labour market releases should keep central bankers comfortably on the sidelines,” said Tiago Figueiredo at Desjardins.

Fiscal policy also blunts the need for monetary aid with Carney's budget offering a deficit of 2.5% of GDP and defense spending set to more than double to 5% in coming years to meet a NATO target. Macklem says fiscal policy is better placed to help damaged industries like steel and autos and the government has recently doubled some of those supports. (See: MNI: Canada Deficits Leave Room For Flexible BOC-Ex-Officials)

A quarter of economists see the Bank cutting early next year as the economy weakens, though they don't expect a direct signal of that so soon after officials signaled the pause. Reasons for holding include sticky core prices and high-profile grocery bills, at a time when officials are using a broader array of indicators to figure out why core prices are still above average. (See: MNI INTERVIEW: Ranchers See Beef Costs Staying Elevated)