MNI BOC WATCH: Macklem Hold Seen With Two-Sided Future Risk

The Bank of Canada is seen maintaining a 2.25% policy rate Wednesday and keeping options open to hike, cut or hold in coming months depending on where oil prices and U.S. tariffs take inflation.

With core CPI around 2% and the headline gauge gaining a bit less than the 3% officials had predicted for April, there's little need to advance a scenario mentioned at the last decision, which would have called for consecutive hikes to contain an energy-driven price surge. Canada has also avoided Governor Tiff Macklem's trigger for a cut around a major escalation of U.S. tariffs.

That leaves in place the Bank's baseline view: the overnight rate can remain about the same, so long as the Iran war doesn't bring widespread inflation and Mark Carney salvages a trade deal with Donald Trump. While all 25 economists surveyed by MNI see a hold at the rate decision due at 9:45am EST and most anticipate a hold this year, investors have been betting on at least one hike since oil became the Strait of Hormuz was blockaded.

Canada's own data has taken a backseat to geopolitical risks, but those figures are also giving mixed signals. First-quarter output stalled, lagging the Bank's prediction for 1.5% annualized growth, but the April flash figure rose 0.4% to suggest a second-quarter rebound. The job market rebounded in May from what had been the worst start to a year since 2009 to the biggest full-time job gain on record outside of Covid.

TREADING WATER

Senior Deputy Carolyn Rogers told lawmakers before the job report officials are taking a broader view of the economy's momentum than that provided by any single data point, and a recent speech by Deputy Nicolas Vincent said the job market has been a tricky mix of cyclical and long-term changes. (See: MNI INTERVIEW: Canada Nowhere Near Recession- Ex BOC Adviser)

Investors are keen to see whether the Bank restates its unusually broad views on options to hold, hike or cut, and whether officials downplay the first-quarter growth downshift. Some economists say the Bank must acknowledge dovish signs from inflation and growth, though Canada has already defied their predictions for a plunge into recession soon after the U.S. imposed tariffs last spring. 

Former Bank officials told MNI the Bank needs to avoid a repeat of the post Covid inflation surge, and the public is well aware of the pain of higher gas prices. Macklem indicated he understands that risk at the April 29 decision, when he told reporters "Governing Council agreed to look through the war’s immediate impact on inflation but if energy prices stay high, we will not let their effects become persistent inflation." (See: MNI INTERVIEW: Pre-Emptive BOC Talk Beats Moves-Ex Deputy Lane)

The Bank cut rates four times last year to what it calls the low end of neutral, aiding consumer spending but not turning around a housing market still unaffordable to many buyers. Macklem has also warned any rate move must be well-timed to ensure it doesn't mistakenly amplify any swing in price gains away from target.