Central bank expected to hold fire as growth stalls and ME conflict clouds inflation
The Bank of Canada looked set to douse expectations of rate hikes this year, with CIBC Capital Markets signaling that governor Tiff Macklem would stick to a cautious script at this week’s decision and press conference.
In CIBC’s latest “Week Ahead” outlook, chief economist Avery Shenfeld said markets have recently been “priced for almost two quarter point hikes by the Bank of Canada this year,” a view his team considered out of step with the weakness on the ground.
“With so much slack in the economy, this is hardly a time to beat up on demand,” he said.
Growth slack and ‘no comment’ guidance
Shenfeld painted a backdrop of soft activity after “a real GDP decline in Q4,” with early 2026 data suggesting “the first quarter is off to a weak start.”
The Canadian economy contracted by more than expected in the fourth quarter as GDP slipped by 0.6%. This took overall growth for 2025 to 1.7%.
He said recent growth and jobs numbers underscore that “this is hardly a time to beat up on demand,” even before the impact of higher energy prices feed through to households.
The economy shed 84,000 jobs and the unemployment rate rose to 6.7%, Statistics Canada reported, with losses concentrated in full‑time and private‑sector positions and driven by youth and core‑age men.
Amid a “thick fog of war,” both the Bank of Canada and the US Federal Reserve are in no position to make bold promises on the path of rates, Shenfeld said.
For Macklem, the task would be to offer what he called “a long winded version of ‘no comment’ … in terms of where monetary policy is headed,” avoiding any hints of tightening that could embolden markets betting on hikes.
Inflation picture still gave BoC breathing room
On inflation, CIBC economist Katherine Judge expects February’s headline CPI to jump 0.6% month over month in unadjusted terms, leaving annual inflation at 1.8% – a move driven by pre‑war energy gains rather than resurgent domestic demand.
“Soft underlying demand in line with labour market slack likely kept core price pressures in check,” she said, pointing to slower rents and only modest increases in the Bank’s trim and median core measures.
Judge argued that, with “core price pressures contained ahead of the oil price shock,” the Bank is likely to “play down its concern around higher energy prices,” even if headline inflation drifts “to just under 3% y/y in the months ahead.”
Bracing for a long pause
CIBC’s economists earlier described 2026 as a transition year, with inflation risks easing and housing still “stuck in a painful reset” rather than overheating.
In December, Judge wrote that the Bank had “played down recent upside surprises in data,” emphasizing flat final domestic demand and muted hiring intentions even as it held the overnight rate at 2.25%.
Other economists at the start of the year also leaned toward a lengthy hold, seeing the current policy rate as “about the right level” unless growth or inflation takes a decisive turn, with only a minority still flagging the risk of late‑2026 hikes.
Meanwhile, the C.D. Howe Institute’s Monetary Policy Council urged the Bank to keep its overnight rate at 2.25% for the next 12 months.
“The consensus to keep the overnight rate target unchanged over the first six months of the year, and the near unanimity one year out, reflected uncertainty over the war in Iran, its impact on oil prices, and the implications for the Canadian economy,” the council said.
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