The Bank of Canada held its headline interest rate at 2.25 per cent this week, but made it clear that the central bank is being pulled in two different directions for future decisions.
On one hand, Governor Tiff Macklem said the bank is watching closely if rising oil prices will lead to widespread price increases for goods and services. There isn’t evidence of this yet, but such inflation could prompt a rate hike.
Meanwhile, renegotiations for the USMCA trade deal are set to begin this summer, and Mr. Macklem has said there are concerns that Canada faces turbulence as it aims to preserve the existing trade agreement.
He said the central bank will need to cut rates to support the Canadian economy if the U.S. imposes new restrictions.
For now, the bank is taking a wait-and-see approach, but it means that variable mortgages come with the unusual possibility of becoming both more expensive and cheaper in the coming months.
Looking to the long term, however, economists such as Royce Mendes, head of macro strategy at Desjardins, believe that the BoC will eventually look to raise rates to 2.75 per cent, which is the midpoint of the bank’s estimated neutral range – the range that neither stimulates nor slows the economy.
“Our expectation is that those rate increases aren’t in the cards until 2027,” Mr. Mendes said.
Bond swaps markets, which reflect market expectations around interest-rate policy, indicate the BoC will hike rates twice before the end of the year, and that a first hike of 25 basis points, or a quarter percentage point, is expected this summer.
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