Governor Macklem left the door open for hikes in his Wednesday press conference, but a top economist says a prolonged hold is more likely
The Bank of Canada surprised nobody with its decision to hold interest rates steady on Wednesday, leaving its policy rate unchanged amid continuing uncertainty about the economic outlook for the rest of the year.
Of more interest to housing and mortgage market watchers is the central bank’s likely approach to its next rate decisions – and market expectations of a rate hike in the second half of the year have jumped thanks to spiking oil prices and the ongoing Iran conflict.
Still, one of the country’s leading economists believes raising rates would be the wrong move – and finds it “hard to believe” the conditions will be right for the Bank to hike in 2026.
Doug Porter, chief economist at Bank of Montreal (BMO), told Canadian Mortgage Professional the central bank should instead consider cutting rates, even though he doesn’t see that as a likely prospect.
“Unless the [US-Iran] conflict ends relatively soon and we get a deal on USMCA [the US-Mexico-Canada Agreement], which clears the way for trade, I just think the economic backdrop is so fraught for growth that it would be an error to raise interest rates,” he said.
On Wednesday, US president Donald Trump waived a longstanding US shipping law for 60 days, a bid to stabilize oil markets as prices continue to whipsaw.
But there’s still no sign that the conflict, which began in late February, is close to an endpoint – and a protracted war could have a serious negative impact on the Canadian economy.
“Canada is obviously more insulated than most other economies, given the fact that we’re physically separated from [the conflict],” Porter said. “Of course, Canada is a significant energy exporter.
“Portions of the economy will actually do just fine through this, but the threat for central Canada, Atlantic Canada, and British Columbia is pretty serious. I personally think that outweighs any benefits that the oil-producing regions will see.”
Macklem says he and BoC ‘stand ready to respond as needed’
For now, “dilemma” is the buzzword for the Bank of Canada as it weighs up its approach for upcoming decisions. Markets fear inflation surging again in an oil price crisis, but the consumer price index (CPI) has slipped and the labour market posted surprisingly weak numbers for February last week.
And Macklem hinted at the possibility of a rate hike in his post-announcement press conference, referencing inflation fears as a potential reason for the BoC to act.
“Governing council will look through the war’s immediate impact on inflation but if energy prices stay high, we will not let their effects broaden and become persistent inflation,” he said. “As the outlook evolves, we stand ready to respond as needed.”
While Porter sees more sense in cutting, he thinks a prolonged pause remains the Bank’s most likely course of action.
“I think the Bank’s word, ‘dilemma,’ is a good one,” he said. “I think that’s where we’re caught. It’s a tough situation for central banks. I think the reality is when you’re faced with such acute uncertainty, the best policy is to do nothing.
“Our forecast is for no rate changes this year. I still think that’s a pretty reasonable call.”
‘The markets are doing some of their work for them’
Part of the reason the Bank might not feel compelled to hike rates: financial conditions have tightened, with global bond yields up and equity market prices down, as the central bank mentioned in its statement.
That means markets are doing some of the heavy lifting for the Bank, Porter said. “The reason why that’s important is if financial conditions tighten, there’s less need for the Bank of Canada to raise interest rates to control inflation,” he said, “because the markets are doing some of their work for them.
“I thought it was kind of a subtle, important signal that they mentioned that financial conditions had tightened.”
The central bank’s next decision on interest rates is set to arrive on April 29, which will also see the release of its second Monetary Policy Report of the year.
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