Skyline of the financial district

The Bank of Canada is widely expected to leave interest rates unchanged on Wednesday, but the policy statement and monetary policy report that accompany the decision will provide more insight on the future direction for rates and the economy, economists say.

Ahead of Wednesday’s rate decision, the consensus is that the central bank will maintain the status quo.

Economists at Bank of Montreal said in a report that with recent economic data coming in somewhat mixed, and the central bank deciding to pause rate hikes at its last meeting to allow time to evaluate the impact of the rapid tightening cycle, the BoC will once again stay on the sidelines.

More closely watched will be the central bank’s communications, including the latest edition of its monetary policy report, which will feature its updated growth and inflation outlooks.

“The economy has performed better than expected so far in 2023, but some deceleration to below-potential growth remains the base case,” BMO said in its report.

And while inflation has moderated, it remains well above the central bank’s 2% target, BMO noted.

Economists at Scotiabank are calling for the BoC to remain somewhat hawkish due to elevated inflation and the economy’s resilience in the face of higher rates.

Scotiabank also pointed to factors such as recent increases in crude oil prices, China’s economic rebound, higher federal spending, and stimulus in the form of strong immigration amid a shortage of housing and other infrastructure.

“Markets are pricing rate cuts this year that seem premature and it may be that they need a a determined reality check by a hawkish-sounding central bank,” Scotia said in a report.

CIBC World Markets also suggested that the Bank of Canada will steer clear of signalling that rate cuts are around the corner.

“For that, we’ll really need to see some genuinely bad news, in the form of higher unemployment and a drop in output for a quarter or two,” it said.

The BoC’s view on the U.S. is “one area where we anticipate much more caution, due to the flare-up of banking sector stress,” BMO said. “It’s only been a few weeks since peak fear, so there’s plenty of uncertainty about the impact.”

As for the latest monetary policy report, the BoC is expected to raise its growth forecasts after a stronger-than-expected first quarter, but the economy is still expected to slow by mid-year.

Additionally, the April edition of the report includes the central bank’s annual assessment on the economy’s potential, BMO noted.

“Any changes in productivity will loom large for how quickly excess demand can be unwound. Indeed, an upgrade could lay the initial groundwork for earlier-than-anticipated rate cuts,” it said. “For now, we continue to expect the BoC will be on hold through 2023, with rate cuts starting in early 2024.”