Bank of Canada preview: Macklem facing a stagflationary headache
The Bank of Canada will deliver its latest interest rate decision on Wednesday and almost surely hold rates steady at 2.25%, the same place where rates have been since a cut in October.
The market also sees very little chance of a rate hike at the July 15 meeting so there is no needs for the BOC to tip its hat.Looking further out, the market prices a 64% chance of a hike in October and is pricing in 35.5 bps of hikes by year end.
That’s the backdrop heading into the decision slated for 9:45 am ET on Wednesday and note that there is no scheduled press conference but there will be a published statement from Governor Tiff Macklem.
In April, the BOC assumed oil prices decline to $75 by mid-2027 and I don’t think they need to waver from that yet. Certainly, they would have hoped the war would be over by now but oil prices have stayed remarkably tame despite the blockade in Hormuz. At $88.07 today, WTI is sequentially down from the prior BOC meeting.
Domestically, there is plenty of talk about a recession and two consecutive quarters of negative growth but Q1 was down just 0.1% and April is looking robust, including today’s strong trade balance report. I don’t think soft growth will factor too heavily into BOC deliberations. Moreover, Friday’s jobs report was very strong.
The Bank’s April forecast projects GDP growth of 1.2% in 2026, rising to 1.6% in 2027. Despite a soft Q1, those numbers are still easily achievable.
Instead, they’re likely to be focused on inflation and stubbornly high prices. The previous statement said this: “So far there is little evidence that oil prices have fed through more
broadly to goods and services prices, but this warrants close attention
in the months ahead."
I’d expect that to be tilted a bit more hawkishly, if only for the length of time that oil prices have been high and are likely to stay that way. The prior forecasts showed inflation is forecast to come down to the 2% target early next year and remain around 2% over the projection horizon. At the current trajectory, that seems unlikely.
The prior statement said they “will not let higher energy prices become persistent inflation" and that could be reiterated or strengthened on Wednesday.
Ultimately, though, I think the BOC will be forward looking a put the focus on two critical things:
1) What happens with the war in Iran
2) What happens with USMCA
Those are two big question marks right now and the BOC likely still feels it has time to evaluate. If anything, there are some hawkish risks as Macklem’s current legacy is blowing it on forward guidance in covid and staying too dovish for too long. He won’t want a repeat.
In terms of the FX market, USD/CAD is currently flirting with the Iran war highs, meaning the Canadian dollar could soon be trading at its worst levels since December. A dovish surprise would push the pair through 1.4000 while tough talk on inflation could defend the current peak
This article was written by Adam Button at investinglive.com.