Bank of Canada: Policy path steady with cautious inflation stance – TD Securities

TD Securities economists Robert Both and Emma Lawrence expect the Bank of Canada (BoC) to keep the Overnight Rate at 2.25% through 2026, before lifting it back to a neutral 2.75% in 2027. They argue that, despite markets pricing more tightening after the September meeting, softer growth and uncertain trade conditions should allow the Bank to remain patient on inflation risks.

BoC seen on extended policy hold

"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."

"Markets have moved to price in more tightening after the Bank expressed more concern over inflation risks at its September policy decision, but without more evidence of higher oil prices broadening into underlying inflation we believe the BoC can remain patient as excess supply is gradually absorbed."

"The near-term growth outlook also looks more uncertain with Section 338 tariffs taking effect in August, which will make it harder for the Canadian economy to sustain its recent momentum."

"We've already seen some evidence of deceleration in the early data for July/August, but renewed trade uncertainty should also give the Bank more reason to keep looking through higher oil prices over Q4."

"The Bank of Canada will hold several public appearances at the IMF/IIF Annual Meetings in Bangkok."