\n
<\/p>\n
The Bank of Canada held its benchmark lending rate at 2.25 per cent for the fourth consecutive time, with many economists saying the price of oil will dictate the future trajectory of rates based on \u201chawkish\u201d warnings from Tiff Macklem , the central bank\u2019s governor. <\/p>\n
Policymakers also released a new Monetary Policy Report (MPR) that updated projections for Canadian economic growth this year to 1.2 per cent from 1.1 per cent and to 1.6 per cent from 1.5 per cent next year. <\/p>\n
The Bank of Canada upped its estimate for headline inflation , but cut its core inflation forecast for the end of the year. It also laid out a scenario where the price of oil stays stuck at US$100 a barrel. <\/p>\n
Here\u2019s what economists think the Bank of Canada\u2019s latest decision and the MPR mean for rates. <\/p>\n
\u201cOverall, the Bank of Canada appears comfortable leaving rates unchanged for the rest of the year, unless oil prices remain high,\u201d Royce Mendes, managing director and head of macro strategy at Desjardins Group , said in a note. <\/p>\n
Currently, policymakers are assuming the price of Brent crude will fall to US$75 a barrel by mid-2027, while West Texas Intermediate and Western Canadian Select will drop to US$70 and US$60, respectively. <\/p>\n
In the near term, they don\u2019t think elevated oil prices will boost gross domestic product or trigger core inflation to rise. <\/p>\n
The Bank of Canada said households and businesses will be hit by higher energy prices, even though some governments and regions will reap benefits. <\/p>\n
But Mendes said policymakers also \u201cimplied that their operational target, underlying inflation, won\u2019t be impacted.\u201d <\/p>\n
However, under a scenario where oil rises to US$100 a barrel, Macklem said rate hikes could be necessary if higher prices leach \u201cmore persistently\u201d into inflation. <\/p>\n
Otherwise, if the base case rolls out as assumed, Desjardins expects the Bank of Canada to start hiking rates to 2.75 per cent, but not until 2027. <\/p>\n
\u201cElevated uncertainty and financial market volatility at this juncture are such that the Bank of Canada does not have sufficient information that warrants a policy change in either direction,\u201d Joe Brusuelas, chief economist at RSM LLP, said in a note. <\/p>\n
But policymakers won\u2019t be able to wait forever. <\/p>\n
If the conflict between the United States and Iran continues into the second half of 2026 and global energy supplies remain blocked, he said the central bank will no longer \u201chave the luxury of looking through inflationary pressures for long.\u201d <\/p>\n
Brusuelas said he thinks the Bank of Canada will have to lay out \u201ca likely policy path\u201d at its next meeting on June 10 since the economy is stuck in a cycle of ongoing slack and high unemployment. <\/p>\n
\u201cPolicymakers will need to tread carefully going forward and prepare both the public and investors for what is looking like an increasingly mean year,\u201d he said. <\/p>\n
\u201cThe Bank of Canada\u2019s decision to again keep its key policy rate at the bottom of its 2.25 per cent to 3.25 per cent neutral range estimate came as no surprise,\u201d Bradley Saunders, North America economist at Capital Economics Ltd. , said in a note. \u201cThe primary focus was therefore on the updated projections in the newest edition of the MPR.\u201d <\/p>\n
Capital Economics said the Bank of Canada is overestimating the economy\u2019s ability to hit its revised GDP targets and is calling for growth of sub-one per cent for the year, especially given that the U.S. has indicated it wants to strike a bilateral trade deal with Canada alongside a potentially renewed Canada-U.S.-Mexico Agreement. <\/p>\n
It also said the spending spree on infrastructure projects announced by the federal government won\u2019t do much to boost the economy in the near term. <\/p>\n
More alarming was the \u201chawkish\u201d tone of Macklem\u2019s opening comments when he said inflation expectations have moved up and there may be a need for rate hikes if high oil prices persist. The Bank of Canada is assuming that its increased growth projections will also hoover up any slack. <\/p>\n
\u201cWith (West Texas Intermediate) back above US$100 per barrel for the first time in over a fortnight and negotiations between the U.S.\/Israel and Iran seemingly at a standstill, there are growing risks to our view that the first interest rate hike will come in 2027,\u201d Saunders said. <\/p>\n
\u2022 Email: gmvsuhanic@postmedia.com <\/em> <\/p>\n