TD Securities strategists anticipate that the Bank of Canada (BoC) will maintain its policy rate at 2.25% through 2026, before returning to a neutral rate of 2.75% in 2027 via two 25 basis point hikes in January and March [1]. This outlook comes despite a recent inflation shock driven by higher oil prices, which have resulted from US strikes on Iran and subsequent threats to global crude supply [1]. TD Securities notes that while this has introduced a material shock to inflation, the BoC is expected to remain patient, citing well-anchored inflation expectations, lower inflation breadth, and muted core inflation momentum as reasons to look through the stronger headline Consumer Price Index (CPI) [1].
TD Securities projects that inflation will peak at approximately 3% in the second quarter, which is above the BoC's projections in the April Monetary Policy Report (MPR) [1]. However, the strategists believe the Bank is well positioned to wait for more clarity on the geopolitical outlook and its spillover effects on domestic CPI before making any policy changes [1].
Market participants are expected to focus on the Bank of Canada's Summary of Deliberations for further insights into the April policy decision and the two-sided risks highlighted in the Bank's guidance [1]. The minutes are anticipated to provide more detail on the BoC's assessment of geopolitical risks and the impact of higher crude oil prices on the Canadian economy, as well as any diverging views regarding the potential for consecutive policy rate increases [1].
Looking ahead, Deputy Governor Alexopoulos is scheduled to speak about AI and productivity at the Ottawa Economics Association on May 13th, with the speech and a moderated Q&A session to follow [1]. Additionally, the BoC will release its Summary of Deliberations on May 13th, and Deputy Governor Vincent will speak in Montreal on May 26th, ahead of the Financial System Review on May 28th [1].
CONCLUSION
TD Securities expects the Bank of Canada to maintain its current policy rate through 2026, despite inflationary pressures from higher oil prices. The Bank is seen as likely to remain patient, awaiting further clarity on geopolitical developments and their impact on inflation. Upcoming BoC communications and speeches are expected to provide additional insights into the Bank's policy outlook.