Bank of Canada set to hold at 2.25% as oil dilemma fades
SkimNews Take
By framing the policy dilemma as "dissolved," the article implicitly suggests opposing forces — weaker oil and stronger domestic data — are now canceling each other out, leaving the Bank on autopilot rather than signaling deliberate direction.
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- Bank of Canada is expected to keep its policy rate at 2.25% on Wednesday for the sixth straight hold, with most economists surveyed expecting no change for the next 12 months and one quarter-point hike partly priced in for December
- Tiff Macklem told central bankers in Sintra the BoC is "comfortable where we are," calling 2.25% "about the right level to keep inflation contained" and within the bottom end of its neutral range
- The dilemma that had pulled the BoC in two directions has eased: benchmark oil fell from above US$100 back into the US$70s, GDP rebounded 0.5% in April after a Q1 contraction, the trade surplus hit a four-year high in May, and unemployment dipped to 6.5% in June
- Annual CPI inflation hit 3.2% in May — the first time above 3% since late 2023 — driven by gasoline, but core inflation measures fell to around 2% with little sign energy costs are bleeding into broader prices
- Risks remain live: renewed US-Iran strikes over the past week triggered sharp oil price moves, and on July 1 the Trump administration declined to extend USMCA for another 16 years, prolonging trade-deal uncertainty for Canadian exporters
- Fed divergence is pressuring the loonie: markets have flipped from pricing Fed rate cuts to at least one hike starting in September under new Chair Kevin Warsh, pushing the Canadian dollar down nearly 4% against the greenback since late April to around 71 US cents
- Toronto-Dominion Bank economist Maria Solovieva flagged Canada's structural productivity gap with the U.S. as an additional drag on the currency, while Capital Economics' Thomas Ryan said a modestly lower inflation forecast in the BoC's upcoming MPR would reinforce the case for standing pat
Why it matters: The BoC's comfort at 2.25% now sits in stark contrast to a Federal Reserve that markets expect to hike starting in September, a divergence that has already pushed the Canadian dollar down nearly 4% since late April to around 71 US cents. For Canadian borrowers, the status quo is welcome, but the un-extended USMCA, renewed US-Iran tensions, and a weaker loonie mean Macklem's "prepared to take action" caveat isn't theoretical — any of those three shocks could force a rethink before year-end.
