BoC Expected to Toe Line Again on Interest Rates
The Bank of Canada is expected to hold its key overnight lending rate at 2.25% for the third straight time on Wednesday amid rising oil prices due to the U.S. and Israel’s war in Iran and ongoing Canadian-American trade tensions.
A new Statistics Canada report released Monday helped ease the central bank’s concerns about inflation, which is a key influencer on the overnight lending rate. StatCan reported that Canada’s core inflation rate dropped to 1.9% in February from 2.3% in January.
Economists do not believe that a recent spike in oil and gasoline prices due to the military actions in the Middle East will sway the BoC, The Toronto Star reported.
“We just don’t think the Bank of Canada will respond [to the spike] any time soon without greater clarity on the situation,” Claire Fan, a senior economist at RBC, told the Star. “We don’t think they should.”
The BoC will announce its decision on Wednesday. BoC Governor Tiff Macklem has warned that the bank could base future rate decisions on economic shocks rather than on typical fundamentals.
The markets have pegged the likelihood of an hold at 90%, according to London Stock Exchange Group (LSEG) data cited by the Star. But expect a rate hike later this year.
Prime Minister Mark Carney’s government continues to negotiate a new Canada-U.S. trade with little sign of progress. The U.S. Federal Reserve is also expected to hold its key rate.
“If energy prices continue to rise rapidly and remain at a high level, that would classify as a pretty substantial supply shock,” Andrew Hencic, senior economist at TD, told the Star. “That’s when the prospect of rate hikes kind of starts being raised because you don’t want inflation expectations to get unmoored and start rising.”
Although a hold is expected this week, economists expect BoC Governor Tiff Macklem to signal that the bank is monitoring the conflict in the Middle East closely and could introduce a rate hike if the prices of oil, gasoline and other products, particularly food, continue to rise beyond expectations.
“They’re going to have to sound more hawkish in the sense of saying, ‘If we see any of this becoming broad-based and there’s a move up in [inflation] expectations, then we might hike,’” Paul Beaudry, a former BoC deputy governor and an economics professor at UBC, told the Globe.
The U.S. Federal Reserve is also scheduled to announce its next interest-rate decision on Wednesday. The Fed is also expected to hold its key rates as the Middle East conflict causes considerable American economic uncertainty.
Pictured: Bank of Canada Governor Tiff Macklem
Photo: Shutterstock
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