The Bank of Canada is set to keep its key interest rate at 2.75% this week. Out of 13 economists surveyed by the Wall Street Journal, 11 believe there will be no change. Even though unemployment is rising and domestic demand is falling, the GDP growth in Q1 was better than expected. This was driven by spending to avoid tariffs, showing some economic stability. Officials are paying attention to core inflation, which reached 3.15% in April, exceeding the Bank’s 2% target and showing its fastest rise in almost a year. The U.S. has also increased tariffs on steel and aluminum, important Canadian exports, which adds caution to inflation forecasts. While a rate cut is unlikely this week, most economists think there may be cuts later this year if conditions remain poor. Any potential changes in policy could start in July. The official announcement will come at 09:45 AM Eastern Time, followed by a news conference with Bank of Canada Governor Macklem at 10:30 AM. The earlier context suggests that interest rates may pause despite some weak indicators like unemployment and soft consumer demand. However, the strong GDP figure, driven more by stockpiling than real growth, softens the view of weakness. Prices, especially those that the Bank monitors closely, are still high. The rise in April indicates that inflation isn’t decreasing as quickly as some may want. Traders should see the gap between weakened demand and steady inflation as a key point. Policymakers are keeping a close eye on underlying price changes when considering any adjustments. This means their responses will rely on data rather than being swayed by general sentiment or seasonal changes. The mention of one-time tariff-avoidance spending suggests that the Q1 growth may not indicate a lasting recovery but rather a temporary effect from inventory changes. Bond markets likely view this week’s meeting more as a fine-tuning than a major shift, with the Governor’s comments after the meeting possibly giving clearer signals. Market participants should adjust short-term prices based on any hints about future rate cuts. We expect a tone that balances weak domestic spending with persistent inflation. Macklem’s comments about 45 minutes after the rate decision may provide additional insight, especially if his guidance changes. He will aim to shape future expectations while keeping options open. Traders will focus on subtle language—any indications of changes in focus will be significant. Since many expect rate cuts later in the year, dates after July are becoming more important. Current forward guidance is uncertain, but by mid-summer, it will be clearer if inflation is decreasing enough for looser policy. For now, traders should reassess rate expectations after carefully reviewing both the written statement and the news conference. Keep an eye out for mentions of domestic consumption as a weakness and whether this concern overshadows risks from external shocks. Underlying volatility, especially in short-term plays, could benefit from a wider range of tolerance. If inflation metrics remain steady into the June reports, the likelihood of a change increases. The economic situation—a mix of weak demand and high prices—limits the ability for significant cuts or large increases. Markets can expect careful steps assessed over time. Macro exposures may respond more to language than to actual moves, so positioning should be reconsidered if it’s too heavily weighted in one direction. Any change in communication style could matter more than a small adjustment in the overnight rate.

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