BoC: Dovish hold with skew to easing – TD Securities

TD Securities strategists report that the Bank of Canada (BoC) kept its policy rate at 2.25% and dropped guidance that the current rate is appropriate. They now see growth risks tilted lower and inflation risks higher, with near-term policy risks skewed toward easing unless a prolonged Middle East conflict forces a reassessment.

Growth risks down, inflation risks up

"The Bank of Canada held rates at 2.25% as widely expected, as the policy statement struck another cautious tone by leaning into softer economic data since January. The Bank noted that risks to growth are now tilted to the downside, while inflation risks are tilted to the upside."

"The Bank stated that it intends to look through higher near-term energy prices but that it will not let this broaden into persistent inflation. They also removed the language from their forward guidance that the current overnight rate remains appropriate. We don't think that signals an imminent shift in policy, but fits with the notion that near-term risks remain skewed towards easing, while a prolonged conflict in the Middle East would make it more difficult to look through."

"BoC flagging the risk of stagflation and a high bar to hike rates potentially given the softening in labor market momentum recently. We like CAD in the current environment vs non-USD peers as it has a lower beta to risk-off, oil links and terms of trade boost (even though modest), and is less exposed to any growth slowdown on the other side of the world from an extended conflict (as it is mainly exposed to the US). However, we expect USDCAD to keep moving higher the longer this extends. Rates and growth differentials will be in favor of the US along with the sustained risk-off."

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