Bank of Canada decision in focus: Is it time to ease or pause?

Global markets are on edge today, anticipating the outcome of the Bank of Canada's (BoC) policy meeting. As investors look for clues on the future path of interest rates, the central bank faces a tough balancing act between slowing inflation and persistent core price pressures. Will the BoC take its first step toward monetary easing, or will it remain cautious for now?

1. Mixed economic signals: Slowing headline inflation, sticky core: Canada's economic indicators have painted a mixed picture over the past two months, making the central bank’s decision more complex. Headline inflation slowed in April, declining by -0.1% on a monthly basis (versus a 0.3% increase in March), while the annual rate eased to 1.7%, slightly above expectations of 1.6%.

However, the core inflation rate — which excludes volatile food and energy prices,, rose to 3.1%, up from 2.8% in March and surpassing analysts' forecasts. This dichotomy complicates the BoC’s outlook: while lower headline inflation may support policy easing, stubborn core inflation calls for caution and restraint.

2. Labor market: Modest gains, rising unemployment: Canada's labor market added 7,400 jobs in April, exceeding expectations of 4,100. Yet, the unemployment rate edged up to 6.9%, slightly above the projected 6.8%. This modest job creation signals a limited labor market resilience, and although it does not yet indicate deep weakness, it also doesn’t provide the central bank with a clear case for aggressive policy moves.

3. Economic growth: Tepid expansion calls for vigilance: March GDP data showed the Canadian economy expanded by just 0.1%, in line with forecasts, following a downward revision of February’s figure to -0.3%. The marginal growth rate underscores a soft economic trajectory, supporting the view that the BoC should proceed carefully as it monitors incoming data on inflation and employment.

4. Market expectations: Caution dominates: According to CIBC, the probability of a rate cut today has fallen to just 28%, down sharply from 65% before the latest inflation report. A Reuters poll suggests the BoC will hold rates steady at 2.75%, with two rate cuts expected later this year.

However, strategists at Scotiabank warn that persistent core inflation could delay any rate cuts. This view implies that any immediate downside in the Canadian dollar might be limited, while future moves may depend heavily on data surprises and BoC guidance.

5. Possible scenarios and market impact scenario 1 – 25 bps rate cut: If the BoC opts to cut the policy rate by 25 basis points and signals concern about slowing inflation, the Canadian dollar is likely to weaken significantly against its major peers. This would also boost risk sentiment and raise expectations for more easing ahead.

Scenario 2 – Hold rates with hawkish tone: If the bank holds rates steady while highlighting the risks of core inflation, the loonie could rally, supported by a perception that the BoC is not ready to ease yet. This scenario could drive short-term gains in the CAD, particularly against lower-yielding currencies.

Conclusion: This week’s BoC decision is not merely a checkpoint in its policy cycle — it’s a test of its credibility, timing, and ability to balance competing economic risks. With global uncertainty mounting and Canada’s inflation story evolving, every word in the BoC's statement — and every signal in the post-meeting press conference — will carry significant weight.

For traders and investors, the message is clear: brace for volatility. The Canadian dollar’s next big move may hinge on a few carefully chosen phrases and a subtle shift in the central bank’s tone.

(This article was written by the author with assistance from language generation tools to support structure and clarity. All insights and opinions are entirely the author’s own.)