BoC: Patience on hikes despite oil shock – TD Securities

TD Securities strategists expect the Bank of Canada (BoC) to hold its policy rate at 2.25% through 2026 before returning to a 2.75% neutral level in 2027 via 25 bp hikes in January and March. They see higher Oil prices from US–Iran tensions as an inflation shock but argue well-anchored expectations and muted core inflation allow the Bank to look through stronger headline Consumer Price Index (CPI).

BoC seen on extended hold then hiking

"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."

"Markets will look to the Bank of Canada's Summary of Deliberations for further insight around the April policy decision and the two-sided risks cited in the Bank's guidance. We look for the minutes to delve further into the Bank's assessment of geopolitical risks and the impact of higher crude oil prices for the Canadian economy. The minutes should also expand on any diverging views around the Bank's guidance and the potential for "consecutive increases" to the policy rate."

"Deputy Governor Alexopoulos will speak about AI and productivity at the Ottawa Economics Association on May 13th; Alexopoulos' speech will be released at 11:05ET, with a moderated Q&A scheduled to follow shortly afterwards. The Bank will also publish its Summary of Deliberations on May 13th at 1:30pm, offering a closer look into the Bank's decision from April 29th. Looking further ahead, Deputy Governor Vincent will give a speech in Montreal on May 26th, ahead of the Financial System Review on May 28th."

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