MNI BOC WATCH: Hold Expected As Geopolitics Shadow Outlook

The Bank of Canada looks set to hold interest rates Wednesday in line with a commitment to keep policy neutral with inflation near target unless a new shock upends that outlook, making any comment about U.S. threats to stability an important subtext.

Governor Tiff Macklem is seen by all 18 economists surveyed by MNI as leaving the overnight rate at 2.25% for a second meeting in a decision due at 945am EST followed by a press conference. There is a revised economic forecast but data since the Dec. 10 decision has done little to alter views that Canada's 2026 base case is tame inflation and weak growth. (See: MNI INTERVIEW: BOC On Hold Barring Fresh Weakness - Ex Staffer)

Macro forces are overshadowed by Donald Trump's seizure of Venezuelan oil production, threats of annexing Greenland and his ambivalence about Canadian trade and security. Tariffs on Canadian autos, steel and aluminum have weakened investment and exports but the economy is showing resilience in avoiding recession. Continued U.S. actions could dent growth more than pushing up inflation because Canada has avoided retaliatory tariffs. 

Bank officials have said the trade war creates an intense but narrow hit to industries facing the highest tariffs, something monetary policy isn't best equipped to tackle. The Bank has already cut four times last year to what it calls the bottom of its neutral range, even as core indexes hovered near 3%. Growth is being supported by Mark Carney's deficit spending including a plan to lift military spending to a NATO goal of 5% of GDP. 

NO NORMALIZATION THIS YEAR

Economists predict the economy is returning to consistent growth after shrinking in the second quarter as most U.S. tariffs took effect. Growth is modest with the Bank seeing GDP up about 1% this year, a pace it says offsets higher costs from trade re-alignment. 

Core inflation remains elevated but slowed for a third consecutive month in December and headline CPI is close to 2%. (See: MNI INTERVIEW: BOC Hold This Year As Economy Rebuilds-Mc Mahon)

Ten of 18 economists polled by MNI see the Bank's rate staying on hold all year in a sluggish economic rebuild. Others are split on a hike or a cut this year, but there's no question geopolitical risks overshadow traditional projections.

"The Bank will not look to normalize policy while the economy still faces great uncertainty over the outcome of CUSMA renegotiations this year," Bradley Saunders of Capital Economics wrote in a research note. "We don’t believe a return to policy tightening is in store until 2027 at the earliest."