- The Bank of Canada (BoC) held its policy rate at 2.25%, noting that maintaining the current setting “balances” the competing risks of economic weakness and rising inflation.
- The opening statement pointed to the weaker growth backdrop. It noted that “GDP edged down 0.1% in the first quarter, weaker than expected at the time of the April Report,” with the economy expected to “remain in excess supply” despite an anticipated near-term rebound, as higher energy prices, global conflict, and trade uncertainty weigh on activity.
- The statement also noted that oil prices have been higher than assumed in April’s Monetary Policy Report, likely nudging up the inflation outlook. However, it also noted that “there has been limited evidence of broad-based pass-through” from energy prices to inflation and that core inflation measures “have moved down to around 2% and the share of CPI components growing above 3% is close to its historical average”.
- Importantly, in the Opening Statement the Bank emphasized policy flexibility, noting that “uncertainty is unusually elevated, and the risks could shift,” with Governing Council prepared to adjust as needed. It stated it could cut rates if U.S. trade restrictions weaken growth or potentially delivering “consecutive increases” if Middle East-related energy shocks lead to persistent, broad-based inflation.
Key Implications
- Another meeting, another hold. Growth to start the year came in materially lower than the Bank of Canada’s last projections, showcasing just how much slack there is in the economy. This slack is expected to continue to help offset the inflation pressures coming from higher energy costs. Whether it is sufficient to prevent broader pass-through to core prices is likely to depend on just how long oil prices stay elevated.
- The outlook remains highly uncertain. Oil prices have come off their peaks but are still high as uncertainty about the course of the conflict in the Middle East persists. On the other hand, negotiations around the CUSMA review between Canada and the U.S. have yet to get started, casting a pall over trade prospects. Recent data suggest a second quarter bounce-back in growth, but one that is insufficient to absorb all of the excess capacity in the economy. Given the competing forces on inflation, we expect the Bank of Canada to stay on hold through the balance of the year.
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