The Bank of Canada is set to announce its interest rate decision next week, with considerable uncertainty surrounding the outcome. While markets are predicting a two-thirds chance of a rate cut, economists from major banks are divided, with some forecasting the central bank will maintain the current rate until July.
Stephen Brown, deputy chief North American economist at Capital Economics, notes that recent resilience in GDP and employment growth suggests the Bank of Canada may err on the side of caution and delay a rate cut. Capital Economics had initially expected a cut as early as March but has revised its forecast based on stronger economic indicators.
Recent data shows that headline inflation slowed to 2.7% in April, marking the fourth consecutive month within the Bank’s target range. However, strong GDP growth and a robust job market, evidenced by a 90,000 job increase in April, have influenced Capital Economics’ updated outlook.
The Bank of Canada’s deliberations reveal a split among governing council members, with some advocating for a rate cut and others emphasizing the need for caution given the economy’s performance. This internal debate suggests the Bank may wait until the July meeting, allowing time to review two additional CPI reports to ensure inflation trends are stable.
Economic factors, including rising global freight rates and differing rate cut expectations between the Bank of Canada and the U.S. Federal Reserve, also play a role in the decision-making process. Brown warns that a significant policy rate differential could impact the Canadian dollar and prompt a more cautious approach from the Bank of Canada.