TD Securities economists Robert Both and Emma Lawrence project 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 anticipated 25 basis point hikes in January and March of that year [1]. This outlook comes despite market participants pricing in additional tightening following the BoC's increased concerns over inflation risks expressed at its September policy decision [1].
The economists argue that softer economic growth and uncertain trade conditions, particularly with the implementation of Section 338 tariffs in August, should allow the BoC to remain patient regarding inflation risks [1]. They note that early data for July and August already show signs of economic deceleration, and renewed trade uncertainty is expected to provide further justification for the central bank to overlook higher oil prices in the fourth quarter [1].
TD Securities highlights that, unless there is more evidence of higher oil prices feeding into underlying inflation, the BoC is likely to maintain its current policy stance as excess supply in the economy is gradually absorbed [1]. The Bank of Canada is also scheduled to make several public appearances at the IMF/IIF Annual Meetings in Bangkok [1].
CONCLUSION
TD Securities expects the Bank of Canada to keep its policy rate unchanged through 2026, citing uncertain growth and trade conditions as reasons for patience on inflation. Market expectations for further tightening have increased, but the economists believe the BoC will wait for clearer evidence before acting. The central bank's cautious approach is likely to persist in the near term.