The Bank of Canada adopted a 'dovish' stance by holding its key interest rate at 2.25 percent for the fifth consecutive time, emphasizing a weak economy over inflation threats, according to economists.
KPMG Economics: 'Look Through Strategy'
Ali Jaffery, chief economist at KPMG Economics, noted that the central bank appears 'more comfortable with its look-through strategy on the energy price shock.' He pointed to ongoing excess supply in the Canadian economy, 'flatlining' GDP, and cooling core inflation as factors providing policymakers with leeway. The Bank of Canada also created 'wiggle room' by describing stagflation—low or no growth combined with rising inflation—as a 'conundrum for monetary policy,' which could justify rate hikes if inflation accelerates further. However, Jaffery does not anticipate a hike, expecting the economy to 'perk up' in the second quarter after a slight contraction in the first, leaving room for growth without triggering inflation. 'The Bank of Canada won't rule anything out given the remaining risks around trade and the geopolitical conflict,' he said, adding that his firm expects the bank to hold rates for the remainder of the year.
Central 1 Credit Union: 'No Rush to Hike'
Bryan Yu, chief economist at Central 1 Credit Union, described the Bank of Canada's tone as 'dovish,' with emphasis on soft domestic economic factors outweighing upside inflation risks. Policymakers cited a drop in government spending, a slumping housing market, and weak business investment as reasons for the hold. Canada's first-quarter GDP came in at minus 0.1 percent annualized, well below the Bank of Canada's estimate of 1.5 percent growth and marking two consecutive quarters of negative growth—technically a recession. On inflation, the bank noted 'well-behaved patterns,' with higher energy costs yet to spill over into other consumer prices. Yu does not believe Canada is in a recession but said the Bank of Canada is prioritizing the struggling economy over the oil price shock, based on the statement's structure. 'From our view, the Bank of Canada is in no rush at this point to hike its policy rate given the soft economic profile,' he concluded.
CIBC Capital Markets: 'Very Patient'
Andrew Grantham, an economist at CIBC Capital Markets, said the main takeaway from the rate hold is that the Bank of Canada is taking time 'to assess the duelling risks to growth and inflation from elevated oil prices on the one hand and trade uncertainty on the other.' This patient approach allows the central bank to monitor evolving conditions before making any policy moves.
