Bank of Canada: Data-dependent through USMCA review – TD Securities

TD Securities expects the Bank of Canada to stay data dependent despite USMCA uncertainty. The bank sees a high bar for trade risks to alter the current path, with the next BoC hike projected for Q1 2027 while the Fed shifts toward easing. Trade outcomes are not expected to materially change the rate-hike timeline under most scenarios.

Trade risks unlikely to shift BoC path

"We look for the Bank of Canada to take a wait-and-see approach to USMCA negotiations, but see a high bar for trade uncertainty to push it off its current path. While the Bank of Canada has said it may need to cut rates further if the US were to impose new trade restrictions on Canada, we've also seen it take a more patient approach when evaluating the impact of tariffs imposed last March (after the move to 2.75%). We would expect a similar approach should USMCA negotiations deteriorate in the coming months, giving the BoC more time to assess growth impacts, any offsets from new fiscal measures, and the risk of de-escalation."

"We also see a high bar for USMCA extension to materially impact the timeline for rate hikes. Insofar as a positive outcome at the joint review is more likely to formalize the status quo than return tariffs to 2024 levels, we don't think that will have a large enough impact on the output gap to pull forward hikes into 2026, especially given recent weakness in Canadian economic data."

"We would push back against the notion that USMCA uncertainty is the only reason keeping the BoC on hold with headline CPI sitting near 3%, given the backdrop of excess supply and softer core inflation. Lastly, Canada's longer economic track record suggests that trade uncertainty is not the only factor constraining business investment. If we do not see material spillovers into core inflation from higher oil prices, we think the Bank can stay patient."

"And if higher energy prices do spillover into broader price pressures and inflation expectations drift higher, then we don't think trade uncertainty will be enough to keep the BoC on hold through 2026."

"In either case, we look for the Bank to remain data dependent over the coming months with the evolution of the output gap, core inflation, and inflation expectations driving the timeline for rate hikes."

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