National Bank Financial Inc. is siding with the markets in suggesting that the Bank of Canada could well leave rates alone tomorrow.

“At a time when about two-thirds of economists are expecting a rate hike by the Bank of Canada on Wednesday, financial markets are still pricing this outcome as no better than a coin toss,” NBF observes.

“For sure, the domestic economy remains robust. On the other hand, the Bank cannot ignore that monetary conditions in this country have been additionally tightened by the recent run up in the Canadian dollar and that the merchandise trade balance adjusted for inflation went into deficit in Q1 for the first time since the mid-1970s,” it says.

“The case for a Bank rate pause is all the more compelling as it comes at a time when the Governor Dodge himself views the recent bout of Canadian dollar appreciation as being driven by Type 2 factors (not associated with rising terms of trade),” NBF adds.

“In our opinion, the current backdrop of low inflation and improving productivity growth presents the Bank with a golden opportunity not to hike on its May 24 rate-setting date in order to avoid fuelling the dollar and give Corporate Canada a chance to adjust to the elevated dollar environment,” it concludes.