Bank of Canada: Rates seen on hold then higher – TD Securities

TD Securities expects the Bank of Canada to maintain the Overnight Rate at 2.25% through 2026, despite headline CPI near the top of its target range. The bank projects a return to neutral at 2.75% in 2027 via two 25bp hikes, as excess supply is gradually absorbed and Oil-driven inflation shocks are assessed, shaping expectations for Canadian Dollar and rates markets.

Policy steady before 2027 normalization

"The Bank of Canada goes into its media blackout on Wednesday ahead of the September 2nd policy decision where TD and the market look for the Bank to hold rates unchanged at 2.25%."

"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."

"The minutes from that meeting will be published September 16th, but there are no other public events on the horizon."