Strong jobs data and persistent oil price uncertainty keep the central bank on the sidelines Wednesday
The Bank of Canada is widely expected to leave its overnight rate unchanged at 2.25% when it announces its decision on Wednesday, with economists from Canada's major banks broadly agreeing that policymakers will stay in monitoring mode rather than signal any imminent move in either direction.
The decision arrives days after a blowout May jobs report that sent the unemployment rate tumbling to 6.6% from 6.9%, with Canada's economy adding 88,000 positions; a result that vastly exceeded the consensus forecast of 10,000 new jobs.
All gains were driven by full-time work, which rose 154,000, while private-sector employment increased by 56,000. Job growth was broad-based across industries, led by construction, information, culture and recreation, transportation and warehousing, accommodation and food services, and manufacturing, though these increases were partly offset by declines in wholesale and retail trade.
Despite the headline strength, economists are largely treating the report as one more data point in a noisy picture rather than a catalyst for a policy shift.
RBC assistant chief economist Nathan Janzen and economist Abbey Xu noted that while the unemployment rate has fallen, the underlying picture is more nuanced. Layoffs have continued to decline, but hiring demand has been soft, with new labour market entrants still struggling to find work. Hours worked rose 0.6% in May after remaining flat in April, suggesting labour market conditions are improving gradually rather than deteriorating.
Rates on hold
RBC expects the BoC to remain on hold for the remainder of 2026, with any hike not arriving until 2027 at the earliest and contingent on growth and the labour market improving into year end.
The jobs report came against a backdrop of two consecutive quarters of GDP contraction, though RBC pushed back on reading too much into the headline numbers, arguing that controlling for a sharp slowing in population, per-capita GDP actually increased in Q1 and overall consumer spending advanced a solid 1.5%.
Real gross domestic income rose 2.7% in Q1, because a spike in oil prices means a larger quantity of imports can be purchased with the same quantity of exports.
TD Economics director and senior economist Andrew Hencic was equally measured on the rate outlook despite describing the jobs report in positive terms.
He noted that while the numbers were solid, employment is essentially back to where it was in January, with an unemployment rate only 0.1 percentage points lower. With the economy continuing to operate below capacity and providing a disinflationary offset to the energy price shock, TD expects the Bank to stay on the sidelines next week and keep its policy rate at 2.25%.
BMO's Benjamin Reitzes, managing director and Canadian rates and macro strategist, was more effusive about the jobs data while reaching a similar conclusion on policy.
"This is an unambiguously strong report," Reitzes wrote, adding that "Canada continues to hold in." He cautioned, however, that employment is still up just 0.7% year-over-year and hours worked are up 0.3% year-over-year, and said the report should ease Bank of Canada worries about the economy somewhat after the negative GDP print, but that "back-to-back negative GDPs, lower oil and tame core CPI point to a less hawkish BoC next week than in April."
CUSMA questions
Central to the Bank's calculus is the tension between persistent energy-driven inflation and the risk of further trade disruption if CUSMA negotiations disappoint.
CIBC Capital Markets economist Andrew Grantham wrote that next week's statement is likely to continue pointing to two-sided risk for interest rates: higher oil prices and inflationary pressures could warrant hikes at some point, while the potential for higher tariffs if trade negotiations don't progress could warrant further cuts.
He warned investors against reading too much into any specific language, noting that the Bank is likely to signal that nothing is imminent and that policymakers are "more than happy to wait to see how these risks play out."
On inflation, Grantham noted that the core picture has been reassuring. Core measures of inflation have continued to decelerate, and while some pick-up will be seen as higher airfares are included over the summer, the lower starting point should help reassure policymakers that a widespread run-up in inflation is unlikely.
RBC’s economists made a similar point, noting that the Bank's preferred core inflation measures surprised broadly to the downside in April, and that while the surge in oil prices has sent headline inflation back above the 2% target, there is little evidence so far that higher energy prices are filtering into broader underlying measures.
Policy placeholder
Scotiabank's Derek Holt, head of capital markets economics, took a more pointed view of the Bank's posture, characterizing it as a policy of systematic deferral.
He wrote that the Bank of Canada's communications on Wednesday are not expected to deliver policy changes and are likely to be largely a placeholder designed to buy time. He expects Governor Macklem’s statement to conclude that the BoC is standing "ready to respond as needed" while "looking through the war's immediate impact on inflation but will not let higher energy prices become persistent inflation."
Holt was openly skeptical of that stance. His firm's forecast calls for 50 basis points of hikes in the fourth quarter of 2026 and a further move in early 2027, taking the nominal policy rate to 3%.
He noted that Scotiabank is "the only shop in Canada that called the market move toward pricing hikes in 2026," with forecasts dating to last November, and argued that at the July 15 decision the Bank will need to incorporate higher-for-longer commodity prices, the federal government's expansionary spring statement, and the potential implications of a restrictive-for-longer Federal Reserve.
