Bank of Canada: Rates outlook and inflation risks – TD Securities

TD Securities economists Robert Both and Emma Lawrence highlight that the Bank of Canada adopted a more hawkish tone, emphasizing upside inflation risks even as core inflation stays subdued. They expect the Overnight Rate to remain at 2.25% through 2026, with a return to neutral at 2.75% in 2027 via two 25 bp hikes. Trade tensions and Oil shocks are seen as important but not yet rate-hike deterrents.

BoC seen on extended policy hold

"The Bank of Canada surprised the market with a more hawkish tone in Wednesday's policy decision where they placed a greater emphasis on upside risks to inflation and sounded less concerned over trade uncertainty."

"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 2027."

"Oil prices have largely normalized after pushing above $100bbl in response to the US-Iran conflict, but this has still introduced a meaningful shock to the inflation outlook with headline CPI sitting near the top of its 1-3% target range."

"We look for the BoC to remain patient as it waits for more clarity on the geopolitical outlook and spillovers to domestic CPI as the combination of well-anchored expectations, narrower inflation breadth, and muted core inflation momentum leave the Bank well positioned to look through stronger headline CPI as excess supply is gradually absorbed."

"Trade tension have escalated with the Section 338 tariffs introduced August 22nd, but these should not prevent BoC rate hikes in Q1 if there is no further escalation."