CA: Bank of Canada Announcement

Highlights

As widely expected, the Bank of Canada looked through the recent energy-led inflation pickup and maintained its key policy rate unchanged at 2.25 percent, repeating it stands ready to respond as needed.

But as it continues to monitor both developments in the Middle East and how the economy is responding to trade uncertainty, the central bank warned that it will not let higher energy prices become persistent inflation. For now, the BOC sees little evidence of this happening, although"it is still early days".

Overall, given the"unusually" high uncertainty,"monetary policy may need to be nimble," both on the upside and on the downside, Macklem stressed. He added there is"no risk-free path" for the policy rate.

While the central bank revised its near-term inflation projections higher, with April CPI seen rising 3 percent year-over-year due to gasoline and food prices, longer-term inflation expectations have remained anchored. Inflation is seen returning to the 2 percent target early next year.

Oil price assumptions were unsurprisingly revised higher. Brent oil prices are now assumed to be US$90 in the second quarter of 2026 and then settle around US$75 by mid-2027"as crude exports through the Strait of Hormuz resume".

On the growth front, despite risks around U.S. trade policy and the upcoming review of the Canada-United States-Mexico Agreement (CUSMA), projections assume lower U.S. tariffs on Canada due to a court order removing U.S. tariffs imposed under the International Emergency Economic Powers Act. The U.S. replaced them with a uniform 10 percent tariff. Now, the average U.S. tariff rate on imports from Canada is assumed at 5.1 percent, down from 5.8 percent in the January Monetary Policy Report.

Despite added uncertainty related to the Middle East conflict, 2026 and 2027 GDP projections were little changed from January.

The BOC projects GDP growth to slow to 1.2 percent this year and 1.6 percent in 2027, compared with 1.1 percent and 1.5 percent, respectively, in January.

"The conflict in the Middle East will affect the composition of growth, but the impact on overall growth is expected to be small because higher global oil prices increase the value of our energy exports even as they squeeze consumers and many businesses," Governor Tiff Macklem said in his opening press conference statement.

The BOC assumes that oil prices will come down and U.S. tariffs will remain at current levels."If this holds true, a policy rate close to current settings looks appropriate to support adjustment in the economy and return inflation to target," he said.

The nominal neutral interest rate is assumed at the midpoint of the 2.25 percent to 3.25 percent range, with risks"broadly balanced".

Market Consensus Before Announcement

BOC on hold with growth holding up surprisingly well and policy-makers looking past the spike in gas prices.

Definition

Canada's central bank, the Bank of Canada (BoC), announces its monetary policy with regard to interest rates eight times a year. The announcement conveys to the financial markets and investors what, if any, changes in policy might be. The main focus is the target set for the overnight rate. Policy is framed around keeping the annual rate of inflation as measured by the consumer price index (CPI) within a 1 percent to 3 percent range and close to the 2 percent midpoint over the longer-run. To this end, the BoC also monitors an adjusted measure of the CPI that excludes a range of volatile categories in order to get a better handle on underlying trends.

Description

Bank of Canada determines interest rate policy at eight meetings during the year and they are an influential event for the markets. Prior to each meeting, market participants speculate about the possibility of an interest rate change. A post-meeting statement is issued after each meeting. Unlike the Federal Reserve, there are no post-meeting minutes. The Bank has an inflation target range of 1 percent to 3 percent with specific focus on the 2 percent midpoint.

Although the Bank monitors many economic indicators, as indeed all central banks do, the Bank converted its inflation barometer for operational purposes to a consumer price index measure that subtracts eight volatile components to better reflect core inflation. It also takes the foreign exchange rate for the Canadian dollar into its monetary policy decisions.

Monetary policy goals are to aid and abet solid economic growth along with rising living standards. To achieve these goals, inflation is kept low, stable, and predictable. The inflation control target is at the heart of Canadian monetary policy that the Bank and the Government have established. The level of interest rates and the exchange rate determine the monetary environment in which the Canadian economy operates.

The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.

Recommended for you

Upcoming Events