BoC Expected to Hold Rates Through 2026, Look Past Temporary Inflation Pressures

• Despite rising inflation risks stemming from a conflict-driven ‌rise in energy prices, the Bank of Canada (BoC) will hold its key overnight rate at 2.25% on June 10 and for the rest of the year, according to ​a majority of economists polled by Reuters,. While a persistent energy shock due to the U.S.-Israeli war with Iran pushed inflation to 2.8% in April from March's 2.4%, it remained within the central bank's 1-3% target range, and a decline in core ​inflation suggests demand remains weak
• That gives the BoC, which cut rates by 275 basis points ​between June 2024 and October 2025, room to stay put as economic ⁠activity lags. Robust job gains in May were welcome news for Canada's economy, which entered a technical recession in the ​last quarter for the first time since the COVID-19 pandemic.
• All 34 economists in June 2-5 Reuters poll ​expected the BoC to leave the overnight rate unchanged next week. Over 80%, 28 of 34, predicted it would stay on hold throughout the year, similar to April poll estimates. Meanwhile, financial markets are pricing in one rate hike by ​the end of 2026.
• Canada's economy continues to struggle with trade-related uncertainties from the U.S., the country's largest trading partner. The U.S.-Mexico-Canada free trade agreement, dubbed USMCA, which has shielded most of the country's exports from ​U.S. tariffs, is up ​for renewal in July. ⁠Dominic LeBlanc, the minister responsible for Canada-U.S. trade, recently said Canada had a positive meeting with the U.S. about the review. Over 40% of poll respondents expected a rate hike in ​early 2027. However, views were split on the timing.

(Source: Reuters)