MNI INTERVIEW: BOC Hold This Year As Economy Rebuilds-Mc Mahon
The Bank of Canada will leave interest rates unchanged at the low end of neutral this year as the economy grinds out a slow rebound from the U.S. tariff shock, a former Quebec finance ministry staffer told MNI.
Governor Tiff Macklem has made it clear "risk management" is how policy is being set and he will only move if there is another major shift, in particular around U.S. trade talks, says Sebastien Mc Mahon, now chief strategist at Industrial Alliance where he's attended an economist roundtable with top BOC staff.
Growth may be as fast as 2% this year rather than the 1.1% officials expect but inflation will remain tame as the economy rebuilds after U.S. exports tumbled, he said.
“The Canadian economy is doing well, not enough to warrant rate hikes in 2026, maybe in 2027 we will start to see it. They are in their sweet spot and it’s a high bar for rate hikes,” Mc Mahon said. (See: MNI INTERVIEW: BOC On Hold Barring Fresh Weakness - Ex Staffer)
DOUBLE DEALING
The policy rate was cut four times last year to 2.25% or the bottom of the Bank's neutral range as President Donald Trump put major tariffs on autos, steel and aluminum while other industries avoided penalties with a USMCA exemption. Canada skirted the recession many investors predicted but investment and exports are weak and a fresh downturn is possible if Trump rips up free trade.
“If they do have to cut, it would be a series of cuts because things are very bad. It’s very low odds,” Mc Mahon said. “They are very deeply entrenched in their risk management approach, which I think is the right approach.”
Trump will likely seek separate deals with Canada and Mexico because that increases his bargaining power, Mc Mahon said. Canada may give some concessions on things like agriculture but the U.S. president will recognize he can't break up vital supply chains, he said.
"At least we will have some clarity,” with a new trade deal, Mc Mahon said. “This will be viewed positively by businesses who have been so negative for so long, and now we get the signal that we need to invest.” (See: MNI: Mild US And China Tariff Damage- NS Finance Minister)
OPTIMISTIC CASE
The most likely scenario is Canada regains enough momentum for the Bank to raise rates twice next year to the middle of the neutral range, he said. There is still an optimistic case for a trade deal in the first half of 2026 requiring tighter monetary policy late this year, Mc Mahon said.
“Investment spending will be turning very quickly" in that case, he said. "This is a scenario that is low odds but it’s definitely possible.”
Canada will also experience spillovers if Trump forces the Fed to slash interest rates, Mc Mahon said, in particular a short-term rise in exports. “Initially I think it will be a positive element, but in the long run if there is a boom-and-bust cycle and the U.S. has some issues down the road, then we could have some issues.”
Resistance from some members of Congress and Trump's distancing himself from the Department of Justice subpoena are signs Jerome Powell's video may have fended off any shift, Mc Mahon said. The real pressure will fall on whoever Trump picks to replace Powell, he said.
“It looks like this is uniting the FOMC even more firmly around Powell,” Mc Mahon said. “Mostly this is an incentive for the next Chair to stay in line.”
