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“Confronted with another spike in oil prices and a fresh wave of U.S. protectionism, Canadian central bankers remained firmly on the sidelines, highlighting their difficult balancing act,” Royce Mendes, managing director and head of macro strategy at Desjardins Group , said in a note. Despite the turbulence, Canada’s economy grew 3.3 per cent on an annualized basis in the second quarter, and he said the central bank has indicated it doesn’t think the latest round of United States tariffs poses a threat to gross domestic product, especially since Ottawa announced a series of support programs to buffer some of the effects. SUBSCRIBER EXCLUSIVE: FP West: Energy Insider brings you behind the oilpatch’s closed doors with exclusive insights from insiders every Wednesday morning.
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The next issue of FP West: Energy Insider will soon be in your inbox. We encountered an issue signing you up. Please try again Mendes said the Bank of Canada appeared to suggest the greater threat lies with inflation from higher fuel prices that could spread to other parts of the economy.
Desjardins expects the Bank of Canada to leave rates on hold for the rest of the year and then hike them by 50 basis points to 2.75 per cent in the first half of 2027. “The Bank of Canada delivered a more hawkish message,” Stephen Brown, chief North America economist at Capital Economics Ltd. , said in a note, citing the central bank’s view that inflation risks have increased. As evidence that policymakers could be contemplating a move on rates, he noted that they replaced a line in the statement that rates “remain appropriate” with one that said the Bank of Canada is ready to adjust rates as needed.
Bank of Canada governor Tiff Macklem indicated he isn’t too worried about the effect of tariffs on Canada’s growth, though Brown added that policymakers acknowledged the escalating trade dispute between the United States and Canada is adding uncertainty at a time when labour demand is still weak. With no end in sight to the U.S.-Iran conflict and elevated fuel prices, Capital has pulled forward its call for a rate hike to December from June next year. “For the doves like us, there were plenty of bones that were dished out,” David Rosenberg, president of Rosenberg Research & Associates Inc. , said in a note on the latest rate decision.
“Bones” thrown included the Bank of Canada’s assessment that inflation has yet to spread beyond the cost of fuel, strong second-quarter growth based on “temporary factors” and new tariff risks upending the sustainability of the country’s economic recovery. Rosenberg said he expects policymakers to hold rates “for some time to come,” especially given the lukewarm demand for labour, which “seals the deal for a stand-pat policy stance, but with a bias more to ease than tighten down the road.” He also said the Bank of Canada warning of tightening lending conditions is further proof that a hike is not on the table. “It does not appear to me to be a tightening in financial conditions that the Bank of Canada views as being desirable,” he said.
“There are a lot of moving parts right now in the Canadian economy,” Ali Jaffery, chief economist at KPMG Economics , said in a note, pointing out the economy is still not operating at full tilt alongside more trade uncertainty. Also, the longer the U.S.-Iran war lasts, the greater the danger that inflation — sitting at the top end of the Bank of Canada target range at three per cent — spreads beyond the gas pumps. Given all this uncertainty, he said the right thing for the Bank of Canada to do is stand pat.
If a rate move were in the cards, Jaffery said the odds lean to a cut as the risks to growth outweigh those from inflation. “We continue to expect the Bank of Canada to remain on hold until the end of 2027,” he said. Join the Conversation This website uses cookies to personalize your content (including ads), and allows us to analyze our traffic.
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Source: Financial Post
