Key Takeaways:
- The Bank of Canada (BoC) is holding its interest rate at 2.25%
- TD Economist Andrew Hencic said the hold was to be expected. Oil prices remain high, but they’ve yet to influence a potential interest rate hike. That’s because Canada’s current soft economy is making it harder for businesses to pass on these rising costs to consumers
- Hencic said if oil prices remain high for long enough, inflation could rise further
The Bank of Canada (BoC) announced for the fourth time in a row that it's holding its interest rate at 2.25%.
The June 10 decision marks multiple consecutive holds in 2026 as the BoC also held its rate in January, March, and April.
In its rate announcement, the BoC said: "Economic activity in Canada has been weak and uncertainty about US trade policy persists. The conflict in the Middle East is ongoing and oil prices remain elevated. Governing Council is continuing to look through the war’s near-term impact on headline inflation, but will not let higher energy prices become persistent inflation."
What does a BoC rate hold mean for Canadians?
Financial institutions use the BoC's interest rate as a benchmark to set their own interest rates on products such as variable rate mortgages and other types of loans.
If the BoC were to cut or hike its interest rate, banks would typically follow suit by lowering or increasing their interest rate on variable rate products.
Not much changes for those with variable rate mortgages when the BoC holds its rate.
Oil prices were high in 2022, which contributed to multiple BoC interest rate hikes. Why isn't that happening now?
Andrew Hencic, Director and Senior Economist at TD Economics, said it can take time for elevated oil prices to have a larger effect, especially given the state of the Canadian economy right now, which is considered weak, or soft.
When oil prices rise, the cost per litre of gas goes up, too.
"For companies," Hencic explained, "That means their input costs have risen. So, when you're the Bank of Canada, and you measure consumer prices, what you're waiting to see is what kind of decisions companies make about passing those added costs on to consumers."
In 2022, oil and some commodity prices (such as wheat) went up at the start of the Russia-Ukraine war.
"The spike in oil prices is very similar today," Hencic said. "What isn't similar is the rest of the economic context."
Back in late-2021 and early 2022, Canadians were emerging from pandemic-era lockdowns. The labour market was strong as companies were rebuilding their supply chains and capacities.
Many Canadians also had accumulated significant savings. Once restrictions lifted, and they had opportunity to spend again, they had the money — and desire — to do so. These factors made it easier for companies to increase prices across the board.
"These are the demand-side factors... If folks have cash, and wages are growing, and labour demand is strong, [then] it's a little bit easier for companies to pass on additional costs because consumers can handle it," Hencic said.
As inflation rose in 2022, the BoC instituted a series of rate hikes in an attempt to tamp it down.
While inflation is rising now, the demand-side factors aren't there today.
"To get prices to grow quickly, you typically need both demand and supply. Yes, we have a supply shock with the energy market, but we don't have the demand side of the equation," like a population eager to spend their savings, said Hencic.
The labour market is soft, and is weighing on wage growth right now. As companies hope to protect their market share in a more uncertain economic environment, they have a harder time deciding whether or not to pass on their additional costs to consumers.
But, Hencic said, the longer energy prices stay elevated, the tougher it is for companies to not adjust their pricing.
"You have this relatively soft economic backdrop that's providing a bit of insulation from the inflationary effects of the energy shock," Hencic said, referring to a combination of factors, including the slow labour market and how oil prices have yet to drive up prices (besides at the gas pump).
"It's prudent in that case to adopt a wait-and-see approach. Wait and see how long energy prices will stay high," continued Hencic, referring to a possible decision from the BoC to raise its interest rate.