MNI BOC WATCH:Hold Shadowed By Talk Of Braking Wider Inflation

Bank of Governor Tiff Macklem is seen holding interest rates at the low end of his neutral range Wednesday and pointing to the need to prevent higher energy prices from the Iran war from turning into stubborn inflation.

Macklem says he can look through the initial effect of higher energy prices so long as longer-term inflation expectations remain stable. Canadians may also be more sensitive to price hikes after the painful run of inflation following Covid lockdowns and the Ukraine war, he told reporters at recent IMF meetings in Washington.

Officials also felt earlier this year that slack in the economy before the Middle East conflict would provide some buffer against inflation pressure, a position harder to maintain with the continuing disruption of shipments through the Strait of Hormuz. Canada’s economy is also showing resilience in recent weeks even as U.S. tariffs on autos and steel remain in place, with Canada’s status as an oil and gas exporter boosts incomes.

While investors have bet on as many as three rate hikes later this year, economists forecast no change to the 2.25% overnight rate in 2026, citing the drag on investment and spending alongside U.S. President Donald Trump’s threat of further breaking his trade deal with Canada. The Bank hasn't hiked rates since mid-2023. (See: MNI INTERVIEW: BOC Inflation Patience Is Warranted- IMF Rep)

LIFT-OFF SCENARIO

All 26 economists surveyed by MNI see no rate change at the decision due at 9:45am EST on Wednesday, and this decision comes with a new quarterly economic projection. National Bank Financial sees officials boosting Q2 inflation to 3% with it fading to just above the BOC's 2% target by yearend, while core measures remain little changed.

"Even if the BoC’s adjustments are minimal, policymakers will stress that risks to the inflation outlook are skewed to the upside, consistent with rising inflation expectations," NBF's Ethan Currie and Taylor Schleich wrote in a client note. They predict unchanged rates this year but "we’ll concede there’s a scenario in which lift-off does take place in late 2026." 

Macklem told reporters at recent IMF meetings he’s aware of dangers around hiking too soon and hitting economic growth, or waiting so long that inflation becomes entrenched. The Bank's January forecast had GDP growth of 1.1% this year, blunted by the drag from U.S. tariffs, with officials saying slack in the economy provides some cushion against inflation. 

BECOMING MORE SENSITIVE

Consumer prices quickened less than economists forecast to 2.4% even as the March figures showed the Iran conflict generated a record jump in gasoline prices, with other costs slowed by a one-off base effect from the end of a tax holiday. 

Still, households see an Iran war that lasts more than six months boosting inflation according to a Bank survey released April 20, while a business poll found some suppliers are raising prices anticipating higher U.S. tariffs this year. Polling by the CFIB business group said firms see price increases of 3.2% over the next year. 

“The Bank will not allow higher energy prices to turn into persistent inflation,” Macklem told reporters during IMF meetings, echoing a view he gave at the last rate decision. He's also said officials can look through the first round effects of higher energy prices. 

While CPI is near target, consumers also remember the last oil shock when inflation reached 8%, he said. “People may be more sensitive to inflation now and having lived through a period where inflation went up rapidly, their expectations could shift faster.”