By Promit Mukherjee
OTTAWA (Reuters) -The Bank of Canada will most likely keep rates on hold at 2.75% on Wednesday for the third time, reflecting a softer-than-expected impact of the trade war with the U.S. on the Canadian economy, which has kept the need for monetary stimulus at bay.
Signs of inflationary pressures, especially of the measures that are closely tracked by the central bank, have also stirred concerns that further cuts could stoke price pressures, economists said.
The BoC would also want to see the result of trade negotiations between Canada and the U.S. before changing its monetary policy stance, said Pedro Antunes, chief economist at Conference Board of Canada, an independent economic think tank.
The United States has set an August 1 deadline to reach a trade deal with its northern neighbor.
“The Bank of Canada doesn’t want to necessarily push too hard on the accelerator,” he said. The central bank needs some gunpowder after the trade deal, he added.
The BoC started to ease interest rates aggressively in June 2024, cutting rates by 225 basis points to 2.75% in March. That is the so-called middle of its neutral rate range, when the monetary policy is not stimulating or restricting economic growth.
Data in the last one month has shown that core inflationary pressures remain above 3%, the top end of its 1% to 3% inflation target range. The economy added 83,100 new jobs in June, signaling that tariffs imposed by the United States this year might not have had much of an impact so far.
Money markets are betting the odds for a rate cut at barely 7% on Wednesday and a less than 100% chance of another cut through the year.
A Reuters poll of 28 economists showed that the lack of clarity around tariffs, combined with recent data on inflation and jobs, will keep the BoC on the sidelines this week. The poll was conducted from July 21 to July 25.
BoC Governor Tiff Macklem will announce the governing council’s decision at 9:45 a.m. ET (1345 GMT) on Wednesday. The bank will also release its quarterly monetary policy report (MPR), which usually contains its forecasts for the economy and inflation.
Doug Porter, chief economist at BMO Capital Markets, said that since the last monetary policy report, the economy has gradually moved closer to the first scenario projected by the bank, which presented an optimistic outlook for tariffs and the economy. The second, worse-case scenario assumed high tariffs and a global recession as a result.
“The range of possibilities has narrowed. So I’m anticipating that the bank will have a single forecast,” he said.
(Reporting by Promit Mukherjee in Ottawa; Editing by Frank McGurty and Sandra Maler)
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