The Bank of Canada (BoC) held its policy rate at 2.25%, in line with market expectations.
The opening statement highlighted that while tariffs and trade uncertainty continue to weigh on business investment, the economy has proven to be relatively resilient. However, it noted that measures of hiring intentions remain “subdued” despite the recent improvements in the labour market.
The Bank expects that inflation will continue to moderate in the coming months. There was emphasis that there could be some “choppiness” in inflation in the months ahead. Nonetheless this is expected to be temporary and there was again emphasis that underlying inflation remains “around 2.5%”.
Importantly the release maintained the statement that “[i]f inflation and economic activity evolve broadly in line with the October projection, Governing Council sees the current policy rate at about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment”.
Key Implications
A sequence of strong employment reports lead to markets repricing the risk of a rate hike from the BoC next year. Dismissing the economy’s resilience would be a mistake, however, the outlook remains challenging and the risks from trade uncertainty remain high.
The hold here was widely expected, and we maintain the view that the balance of risks to the outlook will have the Bank on hold in the coming months. Of course, uncertainty remains sky-high and with discussions about the renewal of the CUSMA trade agreement set to pick up (along with some delayed data), we expect the Bank of Canada to maintain its data dependent approach.
