By Promit Mukherjee
OTTAWA (Reuters) -The Bank of Canada on Wednesday is likely to keep interest rates unchanged at 2.75% for the third time, economists and market analysts predict, as firm core inflation and robust job growth lessen the urgency to ease rates.
The central bank, economists and businesses are increasingly hoping that the worst-case scenario from the impact of President Donald Trump's tariffs is over.
"Core inflation is still a little bit hot for the Bank of Canada's comfort," said Doug
Porter, chief economist at BMO Capital Markets.
"And on top of that, most of the economic data we have seen in recent weeks and even months has been a little less bad than expected," he added, saying that the chances of a continued pause in rates are much more likely.
The spillover effects from high tariffs on steel, aluminum and automobiles have largely been confined within those markets while other sectors posted job growth in June.
The economy added 83,100 new jobs in June, the first net increase since January. The unemployment rate fell to 6.9% in June with surprise job growth in sectors including wholesale and retail trade, as well as manufacturing, healthcare and social assistance.
At the same time, the core measures of inflation that the BoC closely tracks have been persistently at or above 3%, the upper end of the bank's 1%-3% inflation target range.
"The Bank of Canada, being a single mandate central bank, cares about inflation the most," said David Doyle, head of economics at Macquarie.
Money markets are pricing in a 7%-8% probability of a rate cut this week.
A Reuters poll of 28 economists showed that the lack of clarity around tariffs, combined with recent data on inflation and jobs, will keep the BoC on the sidelines this week. The poll was conducted from July 21 to July 25.
Nearly two-thirds of the economists surveyed, 18 of 28, forecast that the BoC would cut its policy rate by 25 basis points in September to 2.50%. More than 60% of the economists predicted a second 25-bps cut before yearend.
The BoC was the first central bank among the G7 countries to start cutting rates in June last year and has been the most aggressive since then in its easing cycle. It has reduced rates by 225 basis points between June last year and March.
BoC Governor Tiff Macklem will announce the governing council's decision at 9:45 a.m. ET (1345 GMT) on Wednesday. The bank will also release its quarterly monetary policy report, which usually contains its predictions on the economy and inflation.
However, the BoC changed tack in April for the first time since the pandemic and offered two different scenarios for the economy as uncertainty on the magnitude and the timing of tariffs have complicated forecasting, the bank said.
"Things are still tremendously uncertain, but it feels like the uncertainty has come down a little bit since then. I would be surprised if they didn't present formal forecasts," Doyle from Macquarie said.
(Reporting by Promit Mukherjee; Editing by Lisa Shumaker)
