Analyst: BoC is currently 'between a rock and a hard place'

US volatility will likely influence the BoC's April 12 decision, says market analyst

Analyst: BoC is currently 'between a rock and a hard place'

In its next policy decision this week, the Bank of Canada will have to take into account the downside economic risks brought about by ongoing volatility in the US financial system, according to Karl Schamotta, chief market strategist at Corpay.

“The Bank of Canada is, unfortunately to a very large degree, sort of pinned between a rock and a hard place at this point,” Schamotta said in an interview with BNN Bloomberg. “They can’t respond to the data by cutting rates, but at the same time, they can’t continue hiking because they are aware that there are huge downside risks ahead for the Canadian economy.”

After an unprecedented hiking campaign through much of 2022, the BoC has held its rate at 4.5% since last month. Schamotta said that the likeliest scenario is another rate hold by the central bank this week.

“I don’t think anyone on [Bay] Street is expecting a hike or really any adjustment here,” Schamotta said. “We are expecting a hold but also a relatively hawkish bias in the accompanying statement.”

Still, the Canadian financial system remains relatively insulated from these pressures for now, due to its sustained labour market strength.

“At the end of the day, it’s shocking that the Canadian economy has not slowed more dramatically than it has [and] that employment is as robust as it is,” Schamotta said. “It really seems to me that the lagging impact of last year’s tightening cycle should be hitting home, that consumers should be shifting spending patterns, but we’re just not seeing it yet.”

The US banking system was rocked by the high-profile collapses of Silicon Valley Bank and Signature Bank in early March.

These collapses have fed into a widespread crisis of confidence in the global banking sector, which was further aggravated by instability in the eurozone brought about by the Swiss government-mandated UBS takeover of Credit Suisse.

The BoC has pledged to remain “nimble” in responding to any domestic effects of this volatility,

“In the past month alone we’ve seen important developments: headline inflation has dropped, and the risk appetite in global markets has pulled back, partly reflecting the increased stress in global banking,” deputy governor Toni Gravelle said recently. “We will consider the macroeconomic impact of this evolving situation as we put together our next projection.”