Market Pricing And Policy Expectations
Markets are described as starting to price in the chance of a rate rise in the OIS curve. The policy tone is expected to shift from the 28 January decision, even if the range of policy actions is described as limited. The inflation pressures are framed as driven by geopolitics and supply factors rather than domestic overheating. A rate rise is described as unlikely to curb energy-led inflation, while adding strain to an economy already affected by tariffs. Looking back to this time in 2025, we expected the Bank of Canada to hold its policy rate at 2.25% throughout the year despite inflationary pressures. The view was that rising energy prices from the war in Iran were a supply issue that monetary policy could not fix. This created a tension between our own forecast and a market that was starting to price in a potential hike. As 2025 progressed, the Bank of Canada did hold rates through the summer, but persistent inflation proved to be more than just an energy story. Core inflation, which excludes volatile items, recently came in at 3.1% for February 2026, well above the Bank’s target. This demonstrated that domestic price pressures were becoming entrenched, forcing the Bank to abandon its prolonged pause.Trading And Hedging Implications
The derivative markets, which last year had tentatively priced in a rate hike, were ultimately pointing in the right direction. The Bank of Canada has since raised its overnight rate twice, bringing it to the current 2.75% to regain credibility. This shows that ignoring the OIS curve’s signals was a missed opportunity. Now, traders should be positioned for the possibility of further tightening, not a pause. While oil prices have stabilized, with WTI crude hovering around $81 per barrel, the focus has shifted to strong wage growth and resilient consumer spending. These domestic factors are what the Bank of Canada will target with its policy tools. In the coming weeks, a key strategy would be to use options on CORRA futures to protect against or profit from another potential rate hike in the second quarter. The market may be underestimating the Bank’s willingness to act again, especially with Canadian GDP growth unexpectedly accelerating to a 1.2% annualized rate in the last quarter. This data suggests the economy can handle higher borrowing costs. Create your live VT Markets account and start trading now.
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