By Paul Vieira
OTTAWA--The Bank of Canada is likely on Wednesday to leave its main interest rate unchanged in a fifth straight decision, as policymakers deal with an economy flirting with a recession and at risk of higher inflation due to energy costs.
All 14 economists surveyed by The Wall Street Journal predicted the central bank would make no change to the target for the overnight rate, which has sat at 2.25% since October. Most economists expect a rate increase sometime in 2027--although two analysts say there is a possibility of increases late this year, while another camp reckons the Bank of Canada policy rate might be on hold until 2028.
In the last decision in April, Bank of Canada Gov. Tiff Macklem said interest rates could stay at their present level as long as the economy evolves according to the central bank's official forecast, while also musing about the need for consecutive rate increases in the event inflation spreads beyond gasoline. His talk of consecutive rate increases led traders to raise their bets on at least two boosts before the end of 2026.
Since then, economic data have surprised to the downside. Core inflation--which strips out volatile items like energy and food--softened in April, while headline prices rose at a slower pace than anticipated. Economic output declined 0.1% annualized in the first quarter, missing the Bank of Canada forecast for a 1.5% gain and triggered recession talk in the country. While the economy has contracted in two straight quarters and in three of the last four, most analysts say it is premature to use the recession label because the downturn lacks depth and diffusion.
The drop in Canada's gross domestic product "is one of many data points that should prompt the central bank to downplay its expectations--and the markets'--for rate hikes in the case of a prolonged conflict in the Middle East," said Dominique Lapointe, senior director of macro strategy at Manulife Wealth & Asset Management.
The economy did receive a jolt of good news late last week, with Statistics Canada reporting net job creation in May and a sharp decline in the unemployment rate. On a six-month basis, however, the economy shed jobs. The trade-exposed sector, facing a squeeze from hefty U.S. tariffs, has cut 64,000 positions since the start of 2026. Prior to the latest jobs data, the Bank of Canada described the labor market as soft.
Ali Jaffery, chief economist at KPMG Canada, said the first-quarter GDP report points to more excess slack, or spare capacity, in the economy than previously believed. Generally, scads of spare capacity signal weakness and tend to put a lid on companies' ability to raise prices.
Jaffery expects the central bank to play down the likelihood of rate increases. "I think their tone will be less firm and they will put less weight on the scenarios in which they raise rates, but won't completely rule anything off the table," he said.
Some economists expect the Bank of Canada to maintain its strident warning about inflation, and the need to raise rates if necessary. Iran and Israel engaged in attacks and counterattacks over the weekend, marking the first time they have targeted each other since a ceasefire brokered by the U.S. went into force in early April. Crude-oil prices rose Monday.
Inflation accelerated in April to 2.8%, or lower than a 3%-plus peak the Bank of Canada had expected. The central bank sets interest rates to achieve and maintain 2% inflation, or the mid-point of a 1% to 3% range.
The Bank of Canada's "primary concern is keeping longer-term inflation expectations anchored, so we expect the comments around inflation will be similar to April's. Whether or not the bank includes the word 'consecutive' is probably semantics," said Andrew Kelvin, chief Canada strategist at TD Securities.
Write to Paul Vieira at paul.vieira@wsj.com
(END) Dow Jones Newswires
06-09-26 0715ET
