A ‘notable upgrade’: economists weigh in on the Bank of Canada’s outlook and latest rate decision

The Bank of Canada building in Ottawa. Photo by HYUNGCHEOL PARK/Postmedia files

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Will it be enough to move the central bank out of neutral this year? Here’s what economists had to say about the latest decision and the likely interest rate trajectory for the rest of the year.

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Looking through energy inflation: Capital Economics

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The Bank of Canada’s messaging “suggests it has no intention of responding to energy-driven inflation with higher interest rates, given its continued concerns about the economy, with the unemployment rate described as ‘soft’ and references to ‘excess supply,’” Thomas Ryan, North America economist at Capital Economics Ltd., said in a note.

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While markets are pricing in some chance of a rate hike, Ryan expects the central bank will “remain on hold” in 2026.

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“Indeed, the statement that ‘Governing Council judges the current policy rate remains appropriate to sustain the economic recovery and bring inflation back to the two per cent target’ underscores this and suggests the Bank is content, for now, to keep the policy rate at the lower end of its estimated neutral range,” Ryan said.

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That said, the bank warned in its latest monetary policy report that it could reconsider if oil prices remained elevated, given “the bigger risk they spill over to other goods and services.”

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“The latest rise in WTI to around $80/barrel is probably not enough to stoke those concerns, but a further rise if tensions in the Middle East continue to flare up would increase the risk of near-term tightening,” he said.

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‘Goldilocks’ projection: Rosenberg Research

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The central bank’s latest assessment of Canada’s economy is a “notable upgrade” from its recent takes, David Rosenberg, founder and president of Rosenberg Research & Associates Inc., said in a note.

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But that doesn’t mean the central bank will tighten policy as markets expect, he said, because “inflation is seen as easing even with the expected growth recovery.” In a statement, the Bank of Canada forecasts that “economic slack will be gradually absorbed” through 2028.

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“At the same time, the Bank seems very confident that the otherwise moribund economy is set for a durable recovery, fuelled by the spillover from the U.S. economy and stimulative financial conditions here at home,” Rosenberg said.

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The central bank said in a press release that “Canada’s economy is showing signs of improvement” as consumer spending remains “solid” and housing activity appears to be stabilizing. It forecasts exports and business investment will pick up modestly.

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“There are a whole lot of assumptions here, that is for sure,” Rosenberg said. “The growth itself should not generate any rate hikes with underlying inflation, already at or near target, seen as being non-problematic. The issue is whether this straw man the BoC created of growth acceleration comes to fruition. We are skeptical.”