TD Securities strategists expect the Bank of Canada to keep the Overnight Rate at 2.25% through the April meeting and likely for the rest of 2026. They expect a more balanced but still cautious message.
They expect higher energy prices to lift the Bank’s inflation forecast in the April Monetary Policy Report. They expect smaller changes to core inflation and GDP forecasts, with the Bank looking past short-term inflation jumps.
They expect the Bank to describe growth risks as two-sided, linked to higher oil prices and the Hormuz Strait closure. They also expect the Bank to focus on risks tied to ongoing USMCA renegotiation.
They cite a downside surprise in recent CPI as support for holding rates. Market pricing shows December at 2.61%, and they expect a move back to pre-war levels to be gradual.
The article was produced with the help of an Artificial Intelligence tool and reviewed by an editor.
The Bank of Canada is likely to keep rates at 2.25% for the rest of 2026, despite what the market is pricing. We see the current market expectation for a rate of 2.61% by December as overdone, influenced more by moves in US markets than a true shift in Canadian policy. This suggests an opportunity to position against future rate hike expectations.
The central bank can afford this patient stance, especially after last week’s March 2026 inflation data came in at 2.1%, well below the 2.4% consensus forecast. While higher energy prices from the Hormuz Strait closure will temporarily boost headline inflation, the Bank of Canada is expected to look past this spike. This reinforces the view that the bar for a rate hike is significantly high.
The recent jump in WTI crude to around $95/barrel presents a two-sided risk that supports the Bank’s cautious approach. While higher prices benefit Canada’s energy sector, they also act as a tax on global consumers, which could slow demand for our other exports. This balance means the Bank of Canada won’t rush to hike rates based on the oil shock alone.
Adding to the uncertainty are the ongoing USMCA renegotiations, with recent comments from Washington stalling progress and weighing on the business outlook. This is a very different environment from late 2025, when the market was pricing in rate cuts amid mild recession fears. The current stability is welcome, but these external risks will keep the Bank on the sidelines.
For derivative traders, this outlook suggests that paying fixed on Canadian overnight index swaps for the December 2026 tenor is unattractive. We believe going long instruments like the December BAX futures contract offers value, as it would profit if the market reprices to a flatter, no-hike path. These positions are a direct play on the idea that current market pricing is too aggressive.
