Bank of Canada seen holding rates steady for third time in a row

The Bank of Canada is widely anticipated to hold its policy rate at 2.75% this Wednesday for the third consecutive time. This decision is primarily influenced by a softer-than-expected impact of the US-Canada trade dispute on the Canadian economy, persistent core inflationary pressures remaining above the 3% target, and strong job growth. The central bank is also likely awaiting the outcome of ongoing trade negotiations, with money markets and a Reuters poll indicating a low probability of a rate cut.

Analysis

The Bank of Canada (BoC) is widely expected to maintain its policy rate at 2.75% for a third consecutive time, reflecting a notable divergence between market expectations and the bank's prior aggressive easing cycle which saw 225 basis points in cuts. This anticipated hold is underpinned by several key factors, primarily an economy demonstrating greater resilience than anticipated to the US trade dispute. Supporting this view is a strong labor market, evidenced by the addition of 83,100 jobs in June, and persistent core inflation remaining above the 3% upper limit of the BoC's target range. These inflationary pressures significantly constrain the central bank's ability to provide further stimulus. Consequently, the BoC is adopting a prudent wait-and-see approach, aiming to preserve monetary policy optionality pending the outcome of US-Canada trade negotiations. This sentiment is echoed in market pricing, which assigns a minimal 7% probability to a rate cut. Furthermore, commentary from BMO Capital Markets suggests the central bank's outlook may be shifting towards its more optimistic scenario, potentially leading to a single, more confident forecast in its upcoming Monetary Policy Report.

Key Decisions for Investors

• Given the high probability of a rate hold, investors in fixed income should not position for imminent monetary easing; future rate trajectory will be dictated by the outcome of trade talks and subsequent inflation prints.
• The hawkish hold, driven by economic resilience and elevated inflation, is fundamentally supportive for the Canadian dollar and domestic-focused equities, however, be prepared for a potential shift in guidance in the BoC's upcoming Monetary Policy Report.
• The primary risk remains the US-Canada trade negotiations, and a negative outcome could rapidly alter the central bank's stance, warranting vigilance for increased volatility in Canadian assets as the negotiation deadline approaches.