Commerzbank’s Michael Pfister expects the Bank of Canada (BoC) to keep rates unchanged as policymakers assess the impact of the Middle East conflict and softer inflation. With core inflation stabilizing just above 2% and the real economy recovering slowly, he argues that any Canadian rate hike is unlikely before the last quarter, leaving Oil prices as the main driver for the Canadian Dollar (CAD) for now.

BoC seen on extended hold

"We are unlikely to see any change in interest rates from the Bank of Canada (BoC) today. Like many other G10 central banks, policymakers are likely to prefer waiting to see the ultimate impact of the conflict in the Middle East."

"This view is supported by the latest inflation figures: the March figures were lower than expected, and the core rate has finally stabilised at just over 2% after many months. There are also a number of other reasons:"

"The real economy is recovering very slowly; Canada should be somewhat better protected from a price shock due to its energy independence; and, above all, there is the ongoing difficult relationship with the US and the approaching USMCA [United States-Mexico-Canada Agreement] negotiations."

"There are therefore few reasons to rush ahead and raise interest rates. Even if an interest rate hike ultimately becomes necessary due to the war, it is likely that other central banks will react first. But a Canadian interest rate hike is unlikely to be an issue until the last quarter of the year."

"For now, monetary policy is unlikely to play a decisive role in moving the Canadian dollar, and the rise in oil prices is likely to take centre stage."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)