Posthaste: Why the Bank of Canada just might hold interest rates again
The Bank of Canada makes its interest rate decision next week and there is still a lot of uncertainty over which way the coin toss will land.
Markets are pricing in about a two-thirds chance of a cut next Wednesday, and economists with most of the Bay Street banks say the same, while acknowledging it’s a close call.
Capital Economics, however, has changed its forecast and now thinks the central bank will hold fire until July.
“While it will be a very close call, the recent resilience of GDP and employment growth leads us to think that the bank will err on the side of caution by waiting until July,” said Stephen Brown, deputy chief North American economist.
That change is significant because Capital at one point predicted the central bank could cut as early as March, a more dovish call than most economists.
Brown said this time last month Capital believed the bank would cut on June 5, and since then in some ways the case has only strengthened.
Data out last week showed headline inflation had slowed to 2.7 per cent in April, the fourth straight month the rate has fallen within the bank’s target range.
Capital estimates inflation will average 2.6 per cent this quarter, which is below the bank’s forecast of 2.9 per cent. And it sees a chance that the consumer price index could temporarily hit 2 per cent in August or September, well before the central bank expected.
But it was the stronger economy and job market that changed its mind on the rate call.
Capital expects data out Friday will show gross domestic product at close to 2 per cent annualized for the first quarter. The labour market also appears to be holding up, with 90,000 jobs gained in April, the strongest increase in 15 months.
The Bank of Canada’s summary of
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