Bank of Canada expected to hold rates steady Wednesday

Canada's central bank is expected to hold its benchmark interest rate steady for the fifth consecutive time when it meets Wednesday, but the message it sends about navigating geopolitical uncertainty may move markets more than any rate move would.

The Bank of Canada kept the policy rate at 2.25% in April. Governor Tiff Macklem signalled at the time that "monetary policy may need to be nimble" as the bank watches effects from the ongoing Iran conflict on energy prices and the outcome of the Canada-U.S.-Mexico Agreement review.

Financial markets are pricing in about a 95% chance of another rate hold Wednesday, according to LSEG Data & Analytics. The real question is how the bank characterizes the economic outlook.

Economic data since April has been "not particularly optimistic," according to RBC senior economist Claire Fan. Canada entered a technical recession — two consecutive quarters of contraction — with first-quarter GDP falling 0.1% annualized. But Friday's jobs report showed the national unemployment rate declining, which slightly balanced the gloom.

"We don't really expect there will be a lot of actual actions when it comes to interest rates," Fan said. "Their language — particularly in terms of how they recognize the confluence of data that's been released since their last meeting — is the thing to watch."

Analysts expect the bank to reiterate its message of staying flexible while cautious. Oil prices have dipped below US$100 in recent weeks on hopes for an end to the Iran conflict, but policymakers know escalation could restart at any moment. Meanwhile, last month's inflation report showed the fastest pace of price hikes in almost two years, driven largely by war-related gas prices.

The economy is currently "in no fit state for higher rates," according to Capital Economics economist Bradley Saunders, who expects the bank to maintain its cautious tone.