TD Securities economists, led by Robert Both, anticipate that the Bank of Canada (BoC) will maintain its overnight rate at 2.25% through 2026, before raising it back to a neutral level of 2.75% in 2027 with 25 basis point hikes expected in January and March of that year [1]. This outlook comes despite a recent inflation shock driven by higher oil prices, which resulted from US strikes on Iranian targets and subsequent threats to global crude supply [1].
The economists view the oil-driven inflation as a manageable shock, noting that inflation is expected to peak at approximately 3% in the second quarter, which is above the BoC's projections in the April Monetary Policy Report [1]. However, they argue that well-anchored inflation expectations, lower inflation breadth, and muted core inflation momentum provide the BoC with the flexibility to look through the temporary rise in headline CPI [1].
TD Securities suggests that the BoC can remain patient as it awaits more clarity on the geopolitical outlook and potential spillovers to domestic CPI, rather than responding immediately to the oil price shock [1]. In terms of upcoming events, Deputy Governor Vincent is scheduled to speak on May 26th about trends in the labour market and structural changes in the Canadian economy, and the BoC will release its updated Financial System Review on May 28th, followed by a press conference with Governor Macklem and Senior Deputy Governor Rogers [1].
CONCLUSION
TD Securities expects the Bank of Canada to keep rates steady through 2026, despite temporary inflationary pressures from higher oil prices. The economists believe the BoC is well positioned to remain patient, given anchored expectations and muted core inflation. Key upcoming BoC communications may provide further insight into the central bank's outlook.