We expect the Bank of Canada to retain its neutral interest rate bias in next week's policy statement. Although inflation has been firmer than the Bank had originally expected, this is partly because of higher food and energy prices. Those are transitory factors that the Bank of Canada can do nothing about. Underlying inflation is still below target and there are plenty of reasons to expect it to remain low. In particular, economic growth is still hit and miss, labour market conditions are unusually weak and inflation expectations remain well anchored. Accordingly, we expect that as far as the medium-term is concerned, the Bank will still be more worried about downside risks to inflation.
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