World events and domestic economic reports are rekindling speculation about the Bank of Canada’s interest rate policy.

The BoC’s Policy Rate came to rest at 2.25% back in October and the central bank has been “hands off” since then.  That has been the expectation of most analysts going forward.  But there are some who are now saying there is a case to be made for a rate increase this year.  The broader markets have also been pricing-in a rate increase during the second half of this year.

They cite the potential for growing consumer uncertainty about rising inflation.  They suggest that worries about shaky trade relations with the U.S. are being exacerbated by the U.S.-Israel war against Iran.

Policy makers say inflation is largely under control and is heading toward the Bank’s 2.0% target.  But persistently high grocery costs and, now, rapidly rising gasoline prices could have an increasingly negative effect on consumer expectations.

“This is always a risk during oil supply shocks given consumers keep a close eye on prices at the pump.  But this is especially the case now with food inflation having also surged in recent months, given that the two make up roughly one-fifth of household spending between them,” Bradley Saunders, of Capital Economics wrote in a recent note.

Those who continue to call for no rate changes until 2027 say the economy may be too weak to tolerate higher interest rates.  They point to the latest Statistics Canada employment numbers.  The economy lost 84,000 jobs in February and the unemployment rate edged up to 6.7%.

Published by First National Financial LP