Canada Economics and G10 FX Strategy: BoC Preview: Waiting for Clarity

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Canada Economics and G10 FX Strategy: BoC Preview: Waiting for Clarity

IdeaMThe BoC can likely tolerate a temporary energy-led move toward 3% headline inflation as

long as the shock does not broaden into core prices, wages, services inflation, or

expectations. So far, the data point in that direction. Shelter inflation remains subdued,

household operations and furnishings remain weak, food momentum has cooled, and

recreation prices have softened. More broadly, excess capacity, weak consumption, soft

investment, slower population growth, and still-subdued labor-income momentum should

limit firms’ pricing power.

In our view, this remains an inflation scare rather than a new inflation cycle. The

hurdle for a near-term hike is therefore high: the BoC would need to see a sustained

broadening of price pressures, not just higher gasoline prices.

(2) Economic activity: the growth details are still soft

The 1Q26 GDP report also supports a hold. Headline real GDP contracted 0.1%Q SAAR

after a revised 1.0% contraction in 4Q25, but the headline was distorted by a large

inventory contribution and gold-related import flows. Inventories added 4.3pp to growth,

largely offsetting a large net export drag as imports surged. In our view, those swings are

noisy and should not be treated as a clean signal on underlying activity.

Exhibit 3: While headline GDP remains noisy, underlying growth is undoubtedly soft

10.000

Canada Real GDP %Q SAAR

8.000

6.000

4.000

2.000

0.000

-2.000

-4.000

-6.000

-8.000

-10.000

Q1/23 Q2/23 Q3/23 Q4/23 Q1/24 Q2/24 Q3/24 Q4/24 Q1/25 Q2/25 Q3/25 Q4/25 Q1/26

Goods Consumption Services Consumption Business Fixed Investment Government Spending

Net Exports Inventories Real GDP

Source: StatCan, Morgan Stanley Research

The clearer signal is softer domestic demand.