TD Securities strategist Andrew Kelvin notes that the Bank of Canada (BoC) is stressing downside risks to growth and appears willing to look through an energy-driven inflation shock. Despite markets embracing a hike narrative, the bank’s commentary and Canada’s output gap suggest a high bar for tightening. TD sees current pricing as inconsistent with a balanced outlook for BoC policy.

Dovish rhetoric clashes with hike narrative

"The March BoC statement heavily emphasized downside risks to the economy amid ongoing trade uncertainty and growing geopolitical uncertainty."

"For our part, we do think the BoC is perhaps reading a bit too much into recent economic data (we're not that far removed from adding 180k jobs from September to November) – but it's worth noting the most recent readings on inflation showed a significant deceleration in core measures."

"Canada is as well-placed as any to handle a burst of inflation, and the BoC has signaled they're prepared to look through the shock in the near-term."

"There is obviously a level for WTI that would spur the BoC into action, but with an output gap in the vicinity of 1% to start the year, it is a very high bar."

"All of which is to say – we don't think the BoC is terribly fussed about the inflation dilemma in the UK or Euro Zone."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)