Despite the fact that GDP surged in the first quarter, many predict that the Bank of Canada will keep rates on hold on Wednesday as inflation cools and due to stress in the global financial system.
The Bank of Canada halted its tightening campaign last month, setting its benchmark rate at 4.50%, making it the first major central bank in the world to do so. Governor Tiff Macklem stated that he wanted to give the eight prior rate increases time to take effect and would refrain from making further increases as long as inflation decreased as anticipated.
“Having led the way to the sidelines, the widespread view is that the global banking sector strains will have locked (the Bank of Canada) there,” said Doug Porter, chief economist at BMO Capital Markets, in a note.
On Wednesday, the BoC will also present its monetary policy report along with updated projections. The bank predicted 0.5% annualised growth in the first quarter, but after flatlining in the fourth quarter of last year, most analysts now anticipate it to be roughly 2.5%.
Deputy Governor Toni Gravelle stated last month that the BoC is “prepared to act in the event of severe market-wide stress” in the financial system, but added that Canada is still far from that stage.
However, according to data source ORTEX’s estimations, hedge fund bets against Canada’s TD Bank Group this week reached $4.2 billion, making it the most shorted banking stock internationally. This is because some analysts are worried about the bank’s exposure to U.S. regional lenders.
Still, Canada’s rapid population growth could lead to the BoC raising its estimate of the neutral interest rate from its current setting of a range between 2% and 3%, say analysts.
The neutral rate is the level at which monetary policy is neither stimulating nor slowing the economy, so increasing the estimate could indicate that the central bank expects rates to eventually settle at a higher level than previously thought.