TD Securities’ Robert Both and Emma Lawrence expect the Bank of Canada (BoC) to keep the Overnight Rate at 2.25% through 2026, before lifting it back to a 2.75% neutral level in early 2027. Strategists argue higher Oil prices from US–Iran tensions are an inflation shock, but believe well-anchored expectations and muted core momentum allow policymakers to look through stronger headline CPI.

Inflation shock but patient stance

"Wednesday's Bank of Canada decision delivered a slightly dovish tone in the policy statement, with the Bank warning that deteriorating trade conditions could force it to cut rates further, while an escalation of geopolitical risks could produce "consecutive increases"; markets latched onto the hawkish elements as the front-end repriced for more aggressive hikes."

"We look for the Bank of Canada to stay on hold at 2.25% through 2026 before a return to neutral (2.75%) next year, with 25bp hikes in January and March."

"Higher oil prices resulting from US strikes on Iranian and subsequent threats to global crude supply have introduced a material shock for inflation, but we believe the Bank can remain patient as it waits for more clarity on the geopolitical outlook and spillovers to domestic CPI."

"We look for inflation to peak ~3% in Q2, which is above BoC projections in the April MPR, but the combination of well anchored expectations, lower inflation breadth, and muted core inflation momentum leave the Bank well positioned to look through stronger headline CPI."

"Note, we changed our BoC call this past week where we now look for two hikes to 2.75% (previously three) in the beginning of 2027."

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