The Bank of Canada (BoC) is expected to keep interest rates steady at 2.25% and maintain a cautious approach amid the US-Iran war and the elevated energy prices.
The market is fully pricing in a rate hike by year-end but these expectations look wrong-footed given the economic backdrop. In fact, the latest Canadian employment report saw -83.9K jobs in February, the sharpest drop since the pandemic, and the unemployment rate rose to 6.7% vs 6.5% prior.
On the inflation side, the latest CPI report missed expectations across the board with the Trimmed-Mean CPI Y/Y easing to 2.3% vs 2.4% prior. This is very close to the BoC's mid-range inflation target of 2%.
Given the economic backdrop and the lingering trade uncertainty amid the USMCA review, the central bank has all the reasons to keep a cautious stance and look through the headline inflation spike that is likely to come in the next months.
The market might be disappointed if the BoC outright dismisses any rate hike expectation or even floats the idea of looking through the upcoming headline inflation increase and consider another rate cut to support the economy in case the labour market deteriorates further.
