The Bank of Canada is set to announce its interest rate decision on April 29 at 9:45 a.m. ET (1345 GMT), with markets anticipating that the central bank will maintain its benchmark policy rate at 2.25% and publish updated forecasts in its quarterly Monetary Policy Report.
Those forecasts will be the first the central bank has offered since the February 28 start of the Iran war, an international shock that has contributed to rising crude and gasoline prices. The uptick in energy costs has prompted concerns that higher fuel prices could feed through to broader inflation and affect economic growth.
Money market pricing suggests traders expect no immediate rate move, while some market participants are pricing in the possibility of a single 25 basis-point increase by the fourth quarter. Economists surveyed by polling, however, largely forecast no change in the overnight rate for the remainder of the year, with many still leaning toward a rate cut amid what they view as weak economic conditions.
Doug Porter, chief economist at BMO Capital Markets, said the Bank of Canada "can tolerate a specific shock in energy prices if it doesn’t fan out in a broader inflation." Porter added that he expects rates to remain on hold because Canada’s economic weakness and uncertainty over the fate of the North American free-trade deal counterbalance inflation concerns arising from higher oil prices.
Market participants and analysts will pay particular attention to comments by Governor Tiff Macklem and other members of the Governing Council for signals about how the bank is assessing the economic effects of the conflict and the related rise in energy costs. Macklem has previously indicated that the central bank would not be unduly concerned if short-term inflation expectations rose as a result of the war.
The Monetary Policy Report that accompanies the rate decision will outline the bank’s updated projections for growth and inflation and provide the Bank of Canada’s assessment of the transmission of the recent energy-price shock into the domestic economy.
Context and implications
Canada is a significant exporter of oil, which means higher crude prices could provide a boost to that sector even as the broader economy grapples with weak conditions. The interaction between stronger energy-sector receipts and softer activity elsewhere is central to the Bank of Canada’s policy calculus as it weighs whether the recent price moves will remain contained or spread into generalized inflation.