Bank of Canada: Policy hold as inflation risks linger – TD Securities

TD Securities economists Robert Both and Emma Lawrence expect the Bank of Canada (BoC) to keep the overnight rate at 2.25% at the June meeting and through 2026, despite softer Canadian data. They see inflation peaking near 3% in Q2, above BoC projections, but argue well-anchored expectations and muted core pressures allow policymakers to look through higher Oil prices.

BoC seen on extended policy hold

"All eyes will be on Wednesday's BoC decision as the primary risk event for Canada, where TD and the wider market look for the Bank to hold the overnight rate at 2.25%, however, we do not expect any material change to the Bank's messaging as it continues to balance a softer domestic backdrop with the risk of broader inflation pressures."

"We look for the Bank of Canada to hold the overnight rate at 2.25% in June while sticking to its message from the last meeting."

"However, we do not expect the Bank to dismiss the risk of broadening inflation pressures and consecutive rate hikes in their guidance, even as they pledge to look through near-term impacts of higher oil prices."

"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."

"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."

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