The Bank of Canada is locked into a \u201cwait-and-see\u201d holding pattern while it navigates a slowing economy and rising oil-driven inflation risks, says an economist.<\/p>\n
The central bank held its benchmark interest rate at 2.25 per cent<\/a> on Wednesday with Governor Tiff Macklem stating that economic weakness and rising inflation pose a dilemma for central banks.<\/p>\n \u201cThe word dilemma is an important word,\u201d says Earl Davis, head of fixed income and money markets at BMO Global Asset Management.<\/p>\n \u201cTo me that says unchanged rates for the balance of 2026.\u201d<\/p>\n The central bank stated that near-term growth looks weaker than expected, and the Canada-United States-Mexico Agreement (CUSMA) is a significant unknown. Meanwhile, risks to inflation are tilted to the upside because of the sharp increase in energy prices. On top of that, Canada\u2019s financial future is muddy because of big structural changes like AI adopting and shifting demographics.<\/p>\n According to Davis, that uncertainty is making it difficult for the Bank to justify either cutting or raising rates.<\/p>\n \u201cWe\u2019ve got so many things on both sides of the choice of easing or hiking, that\u2019s why we believe they will remain unchanged for the balance of the year,\u201d he says.<\/p>\n Oil becomes the key variable<\/p>\n While Canada\u2019s economy slipped into a technical recession in the first quarter, the bank is also monitoring inflation risks stemming from higher energy prices resulting from the war in Iran, says Davis.<\/p>\n The price of Brent crude oil was US$92.43 a barrel on Wednesday morning<\/a> after U.S. President Donald Trump warned Iran that they will \u201cpay the price\u201d<\/a> for dragging out peace negotiations to end the war.<\/p>\n \u201cI think that the US$90 level for oil is an important pivot point,\u201d says Davis.<\/p>\n \u201cThe further below US$90 that we go definitely maintains rates where we are. If we go below US$80, I think there\u2019s eases back on the table. Above US$90, they want to maintain their optionality, and I think above US$$100 you know, hikes are definitely a stronger possibility.\u201d<\/p>\n The central bank noted there has been limited evidence that higher energy prices are feeding through to broader inflation, but Davis warned that could change if the conflict drags on.<\/p>\n \u201cIf there is no resolution to the Iran-U.S. crisis slash war, what happens is there\u2019s nonlinear effects on inflation. It means inflation spikes. It doesn\u2019t just rise gradually,\u201d he says.<\/p>\n \u201cThe expectation would be, the pass through would come through if there\u2019s no resolution by August, and that\u2019s where the risk is from the Bank of Canada.\u201d<\/p>\n Davis says countries have so far been relying on oil reserves to help cushion consumers from higher prices, but those stockpiles are being depleted.<\/p>\n \u201cWe\u2019re coming very close to those oil reserves running out,\u201d he says.<\/p>\n \u201cOnce they run out, that\u2019s when you see a jump in oil prices.\u201d<\/p>\n Growth concerns remain<\/p>\n While Canada recently posted a stronger-than-expected employment report, Davis says it remains unclear whether the labour market has stabilized.<\/p>\n