The Bank of Canada is expected to hold rates steady in this week’s policy decision, but it should deliver a rate cut, argues Desjardins Group in a new report published Friday.
While markets appear to anticipate no change, economists at Desjardins say the central bank should resume easing, given “the downside risks to growth and the shifting inflation landscape.”
On inflation, the latest data “looks more benign than at first sight,” the report said, noting that recent strength in core inflation was the primary reason markets forecast steady policy.
However, the source of that inflation was narrow, driven by rents and airfares, “which are notoriously volatile and seasonally erratic,” it noted.
“We don’t suspect these shifts mark an inflection to sustained price momentum in these categories,” it said, adding the data was also affected by other potentially temporary factors, such as higher tariffs.
As a result, “the Bank of Canada should probably disregard the noise currently affecting its core CPI measures,” it said.
At the same time, “there is room for cautious optimism on the inflationary outlook for retaliatory tariffs,” it suggested.
“While future trade policy decisions affecting Canada remain hard to predict, the tone between Ottawa and Washington has grown more conciliatory in recent weeks,” it said. “The legal obstacles that Trump’s trade policy encountered this week could perhaps also help pave the way for a deal.”
Risks to growth remain elevated, the report added.
“We continue to expect that a mild Canadian recession has begun this quarter, reinforcing the case for policy action to ease the pressures facing trade-exposed and rate-sensitive segments of the economy,” the report said.
Rates would remain in neutral territory, even with a 25-basis-point cut this week, it said.
While the central bank may prefer to wait for more data, Desjardins said, “this is the apology of hesitancy. Indecisiveness comes at the expense of responsiveness.”
Cutting rates on Wednesday would “allow the Bank to get ahead of a downturn at a time when upside tail inflation risks have diminished,” it said. “In other words, if Macklem still takes the lags of monetary policy seriously, this is the moment for him to take the lead.”