The BoC held its overnight rate at 2.25%, as expected, but the subtext was more interesting than the decision.
Looking through.
- May’s employment report was strong, but the BoC looked straight past it. Employment is flat on the year, and unemployment is range-bound at 6.5–7%.
- Q1 GDP contracted 0.1%, well below the April MPR forecast. But this was due to an unexpected decline in government spending, which is expected to reverse in Q2, with growth picking up in the second half of the year.
- Headline CPI at 2.8%, heading toward 3%, but the BoC continues ‘to look through the war’s near-term impact on headline inflation.’ Core inflation has moved down to ~2%, with limited evidence of broader pass-through.
The implications.
- Although the bond market is pricing in a hike later this year, we believe the BoC will remain on hold throughout 2026.
- If we do indeed see a pickup in growth (i.e., a positive CUSMA outcome), we see a mild rate-hike cycle as a 2027 story.
- The long and short of it is that in the short term, we continue to favour the short end (i.e., 2–5y) of the Canadian yield curve.
