Bank of Canada: Patient path to neutral – TD Securities

TD Securities economists, led by Robert Both, expect the Bank of Canada to keep the overnight rate at 2.25% through 2026 before lifting it back to a 2.75% neutral level in 2027. They see higher Oil-driven inflation as a manageable shock, with well-anchored expectations and muted core momentum allowing policymakers to look through a temporary rise in headline CPI toward roughly 3% in Q2.

Policy on hold despite Oil shock

"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."

"Deputy Governor Vincent is scheduled to speak on Tuesday, May 26th, about "Trends in the Labour Market and Structural Change in the Canadian Economy"."

"On May 28th, the Bank will publish its updated Financial System Review at 10:00 ET, ahead of an 11:00 press conference with Governor Macklem and Senior DG Rogers."

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