Central bank’s language suggests it’s happy to keep rate moves on ice, says BMO’s Guatieri
The Bank of Canada’s April interest rate announcement suggests it could remain on the sidelines for a long stretch as it waits to see how global risks affect the Canadian economy, according to a top economist at Bank of Montreal (BMO).
The central bank held rates steady at 2.25% on Wednesday, a widely expected move with decisionmakers weighing the risk of an inflation uptick against a possible economic downturn.
Sal Guatieri (pictured top), director and senior economist at BMO Capital Markets, told Canadian Mortgage Professional its language indicated it was in no rush to step into the fray and either cut or raise rates anytime soon.
“Today it does look like the Bank of Canada is on hold for the foreseeable future,” he said. “There are of course risks on both sides to that call. If the trade war ends up causing further harm to our economy, the Bank may need to cut rates.
“But at the same time, the Iran conflict and the resulting rise in oil prices could push inflation higher and the Bank of Canada may need to respond to that.”
Macklem: policy rate close to current level ‘looks appropriate’
The Bank said in its statement accompanying Wednesday’s decision that it expects the inflation rate to rise to around 3% in April, but doesn’t see a prolonged price shock from the Iran war.
The consumer price index (CPI) will likely decline to about 2% early next year and remain at that level for a prolonged spell, according to the central bank.
That means while governor Tiff Macklem has consistently flagged the risk posed by higher oil prices and a protracted US-Iran conflict to the inflation outlook, it still views any long-term inflation spike as unlikely and sees any pass-through from costlier oil as contained, rather than broad-based.
And Guatieri sees the Bank’s policy rate staying unchanged for a long period – potentially even stretching throughout all of 2027. “We take it to mean that the Bank is probably on hold for the rest of this year and through next year,” he said.
Macklem’s opening statement to reporters at Wednesday’s press conference hinted that he preferred a pause but was also leaving the door open for a change in approach down the line.
“Our baseline forecast assumes oil prices will come down and US tariffs will remain at the current levels,” he said. “If this holds true, a policy rate close to current settings looks appropriate to support adjustment in the economy and return inflation to target.
“There may still be a need to adjust the policy rate depending on how the risks evolve. But if the economy evolves broadly in line with the base case, changes in the policy rate can be expected to be small.”
What a prolonged BoC pause would mean for housing
A lengthy Bank of Canada rate hold would hold variable mortgage rates steady, while BMO also sees 10-year Government of Canada bond yields – which heavily influence fixed mortgage rates – remaining largely unchanged.
On one hand, a steady spell for mortgage rates could inject a degree of calm into the outlook for homebuyers and owners, lowering fears of a rapid spike in borrowing costs.
Still, Guatieri said the geopolitical chaos sparked by the US’s tariff regime and its war in Iran will probably continue to weigh against the housing market’s performance as buyers hold off on a purchase while that volatility continues.
“Unfortunately, it’s the economic uncertainty – both related to the trade war and the Iran war – that will likely keep a lot of buyers, especially first-time buyers, on the sidelines,” he said.
A steady rate outlook also means buyers wouldn’t get much help from the central bank or bond market in bringing borrowing costs lower. But there’s at least some good news for buyers on the affordability front, at least in Ontario: the fact that prices are continuing to slide, boosting their purchasing power even further.
“At least for Ontario, where we’re seeing an ongoing correction in home prices from earlier lofty levels, that adjustment will continue to come from lower prices, at least in the near term – maybe for most of this year,” Guatieri said.
“That’s how we will see the improvement in affordability that ultimately draws more buyers into the market, and we’ll ultimately see prices stabilize in Ontario.”
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