The Bank of Canada has held its benchmark lending rate at 2.25% for the fourth consecutive time, but many economists are warning that rate hikes could come sooner than expected due to 'hawkish' signals from Governor Tiff Macklem. The price of oil is expected to be a key factor in determining the future trajectory of interest rates.
Bank of Canada's Latest Decision
Policymakers also released a new Monetary Policy Report (MPR) that updated projections for Canadian economic growth this year to 1.2% from 1.1% and to 1.6% from 1.5% next year. The Bank of Canada upped its estimate for headline inflation but cut its core inflation forecast for the end of the year. It also laid out a scenario where the price of oil stays stuck at US$100 a barrel.
Economists Weigh In
Royce Mendes, managing director and head of macro strategy at Desjardins Group, said in a note that 'Overall, the Bank of Canada appears comfortable leaving rates unchanged for the rest of the year, unless oil prices remain high.' Currently, policymakers assume Brent crude will fall to US$75 a barrel by mid-2027, while West Texas Intermediate and Western Canadian Select will drop to US$70 and US$60, respectively. In the near term, they do not think elevated oil prices will boost GDP or trigger core inflation to rise.
However, under a scenario where oil rises to US$100 a barrel, Macklem said rate hikes could be necessary if higher prices leach 'more persistently' into inflation. Desjardins expects the Bank of Canada to start hiking rates to 2.75%, but not until 2027 if the base case unfolds.
Joe Brusuelas, chief economist at RSM LLP, noted that 'Elevated uncertainty and financial market volatility at this juncture are such that the Bank of Canada does not have sufficient information that warrants a policy change in either direction.' But he warned that if the conflict between the United States and Iran continues into the second half of 2026 and global energy supplies remain blocked, the central bank will no longer 'have the luxury of looking through inflationary pressures for long.' Brusuelas believes the Bank of Canada will have to outline a likely policy path at its next meeting on June 10, given the economy is stuck in a cycle of slack and high unemployment. 'Policymakers will need to tread carefully going forward and prepare both the public and investors for what is looking like an increasingly mean year,' he said.
