BoC Set to Hold as Inflation and Growth Concerns Fade

The Bank of Canada is widely expected to hold the overnight rate at 2.25% at Wednesday’s policy announcement—marking a sixth consecutive pause after 50 basis points of cuts over September and October last year. The BoC highlighted two-sided risks to the interest rate in their prior policy meetings – risks of cuts tied to potential downside growth surprises and hike risks due to concerns that higher energy prices from conflict in the Middle East could lead to “generalized inflation.” But both concerns have broadly eased over the last month to help solidify expectations for the central bank to remain in a wait and see mode for now. The spike in oil prices has yet to show significant signs of turning into a broader longer-lasting inflation shock. Higher gasoline prices have raised costs for households, but price increases haven’t generally spread across the consumer spending basket. The BoC’s Business Outlook Survey showed businesses’ longer-run inflation expectations still well-anchored in May when oil prices were at recent peaks. And oil prices have since moved lower despite still significantly restricted traffic through the Strait of Hormuz. At the same time, Canada’s growth and labour market data have looked better after a downside surprise in Q1 gross domestic product growth. Critically, CUSMA continues to protect the bulk of Canadian exports from U.S. tariffs despite the U.S. administration opting not to (yet) extend the 2036 expiry date of the deal, and broader U.S. tariff rates have been edging lower. Monthly GDP data so far is pointing to stronger growth in Q2. Labour markets showed more signs of steadying in May and June after job losses earlier in the year. Our tracking of consumer spending has remained resilient. And housing markets have firmed in cities like Toronto and Vancouver that significantly underperformed previously. We’re also looking ahead to May’s manufacturing and wholesales’ reports on Wednesday. Both should look softer than in April, particularly controlling for higher energy prices, but not enough to retrace larger gains in the prior months. Statistics Canada’s advance estimate is for a 0.1% increase in real GDP in May after a 0.5% April increase, leaving growth in Q2 tracking in line with an about 2% annualized rebound. Overall, we continue to expect the combination of a soft but gradually improving Canadian per-person growth backdrop will leave the BoC on hold through 2026. U.S. CPI growth likely remained elevated but slowed in June with gasoline prices falling ~10% (on a seasonally adjusted) basis from May. We look for headline CPI growth to edged down to 3.7% after rising above 4% for the first time in three years in May. Excluding food & energy products, we expect core inflation to remain elevated at 2.8% on a 0.2% month-over-month increase. We expect U.S. retail sales edged down 0.4% in June driven by a sharp pullback in oil prices lowering spending at gasoline stations. Accounting for price changes, spending should still look firm, supported by a 2.8% increase in unit vehicle sales and an assumed 0.4% increase in control (excluding gasoline stations, motor vehicle sales, and building material stores).