Canada Economics and G10 FX Strategy: Bank of Canada Reaction: What Could Tilt the Balance?

Research evidence excerpt

Canada Economics and G10 FX Strategy: Bank of Canada Reaction: What Could Tilt the Balance?

IdeaMOil prices are now roughly $10/bbl above the April MPR assumption, pushing expected

headline inflation closer to 3% in the near term. Still, the Bank continues to see limited

evidence that higher energy prices are feeding through into broader prices.

The growth assessment became less constructive relative to April. In April, the Bank

described the Canadian growth outlook as little changed from the January MPR and

expected excess supply to be gradually absorbed. In June, it flagged weaker-than-expected

Q1 GDP, weak activity, and continued excess supply even after an expected Q2 rebound.

The Bank also treated May employment strength as volatile rather than evidence of a

durable labour-market improvement, in line with our expectations.

Our view

Our base case remains an extended hold through 2026 and 2027. The June decision

reinforces a wait-and-see stance rather than a directional policy shift. The current mix

of contained core inflation, weak private demand, excess capacity, and unresolved US

trade uncertainty argues for patience.

The bar for hikes remains high. A temporary energy-led move in headline inflation

toward 3% is unlikely to be enough, in our view. The BoC would need evidence that higher

oil prices are broadening into core prices, wages, services inflation, or inflation

expectations. Given excess supply and soft domestic demand, firms’ pricing power should

remain constrained unless oil prices stay persistently elevated.

The bar for cuts is also high. Trade uncertainty is already weighing on exports,

investment, and business decisions, but cuts would likely require a materially worse trade

shock that clearly weakens growth beyond the Bank’s current assumptions.