BoC Preview: Forecasts from six major banks, rates unchanged but hawkish bias

We look for the BoC to step off the sidelines with another 25 bps hike to 4.75% in June. Economic data has remained resilient, and the Bank's conditional pause is looking less tenable without clear evidence of a material slowdown in the first half of 2023. We look for a relatively hawkish statement, with the Bank leaving the door open to further tightening in the coming months.

We expect the BoC to leave the policy rate at 4.5%, but after stronger-than-expected consumer price inflation and GDP and with the labour data remaining robust, we cannot rule out a surprise interest rate increase. A hawkish hold should be enough to keep the Canadian Dollar supported.

The economy’s resilient start to 2023 likely has the Bank of Canada actively considering raising interest rates. But we think it will ultimately maintain the pause in hikes that began in January, keeping the overnight rate steady at 4.5% for now. 

We’re looking for the BoC to maintain the overnight target at 4.5%. Recent headline data has hardly been reassuring but we still believe a modicum of patience is needed/warranted to get a better assessment of the apparent rebound in inflation, housing and GDP will be sustained. It’s also worth highlighting that a new MPR will not be unveiled alongside the decision. That by no means precludes a rate hike but means there wouldn’t be a Macklem-Rogers press conference or fresh economic/inflation projections to support a potential rate increase. While there will be a BoC speech and press conference the day after the decision, it’ll be Deputy Governor Paul Beaudry at the podium. Again, one would assume that a resumption of tightening would warrant having the BoC’s top dog(s) deliver the news, smoothing over any interpretational issues, should they arise. Nonetheless, the Bank hasn’t shied away from unpredictability over the past year and while we lean towards no change, this is not a high conviction forecast. Investors beware, this is very much a ‘live’ meeting.

With consistently stronger than expected activity and stably too strong inflation, the 4.50% level of policy rates is unlikely restrictive enough to slow activity and bring inflation back to 2%. As a result, the BoC is expected to raise rates again by 25 bps. Guidance in the policy statement will be important, although we do not anticipate many changes here. Guidance should continue to be that the Governing Council ‘remains prepared to raise the policy rate further if needed to return inflation to the 2% target’. Leaving guidance unchanged could be interpreted as somewhat hawkish.

The BoC will opt to keep rates on hold at 4.50% for the third meeting in a row. If inflation trends remain elevated and activity remains resilient, there certainly remains a risk the BoC will raise its policy rate further beyond 4.50%. However, in our view, the more relevant debate is how quickly the BoC turns to monetary easing in the quarters ahead. With our expectation for the Fed to begin monetary easing in 2024, and with inflation in Canada slowing down steadily but gradually, we also now expect BoC rate cuts to be delayed until the first quarter of next year, compared to our previous forecast for rate cuts to begin in Q4-2023.