Rabobank’s Molly Schwartz and Christian Lawrence expect the Bank of Canada (BoC) to keep its policy rate at 2.25% at the June 10 meeting and through year-end. They highlight that Canadian OIS pricing implies only one hike, while external shocks from higher Oil prices and US trade policy leave policymakers reluctant to adjust rates in either direction.

BoC seen sidelined through year end

"We expect the Bank of Canada to hold the overnight policy rate at 2.25%—in line with the unanimously held view among 25 Bloomberg surveyed analysts. The Canadian OIS curve is also pricing in a no change decision."

"We expect the Bank of Canada to maintain the overnight policy rate at 2.25% at the June 10 meeting, and expect the rate to be held at that level through year end. While the OIS curve suggests the market is positioned for one hike this year, we believe there are several factors leaving the Bank reluctant to make a move."

"There are opposing economic forces that the Governing Board is not yet ready to prioritize in favor of one direction over the other. Indeed, the war in Iran has sparked inflationary fears in Canada. While the Bank of Canada recognizes it cannot influence energy prices via monetary policy, Macklem has stated that the Bank hopes to control the second and third order effects."

"Additionally, even if the Bank were to cut given the recession, the economic forces driving the recession are also external, largely driven by the evolving trade environment with the US. Neither the driving force of inflation nor economic deterioration are domestic economic forces that monetary policy is designed to handle—changing the interest rate can’t open the Strait of Hormuz nor open up free trade with the US."

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