Bank of Canada: Rates Likely to Hold Steady Before Moving Higher – TD Securities

TD Securities' latest report indicates that despite Canada's headline inflation approaching the upper end of the target range, the Bank of Canada is expected to maintain its current overnight rate of 2.25% unchanged, a stance that could persist until 2026. The firm also projects that the rate path will turn higher thereafter.

**Inflation and Oil Prices Pose Upside Risks**

Recent volatility in energy markets has added significant uncertainty to Canada's economic outlook. According to market analysis, sustained oil price increases are providing structural support to Canada as an energy-exporting nation, potentially pushing headline inflation higher while diminishing the need for near-term rate cuts. Some institutions estimate that a sustained 10% rise in oil prices could lift headline inflation by approximately 40 basis points. Against this backdrop, market pricing has begun to reflect a hawkish repricing of the future rate path, shifting from earlier expectations of cuts toward bets on potential hikes.

**Labor Market Signals Are Mixed**

Domestic economic data in Canada present a mixed picture, adding complexity to the central bank's decision-making. On one hand, GDP contracted in late 2025, signaling signs of economic weakness; on the other hand, labor market data shows the unemployment rate fell to 6.5%, though this improvement was primarily driven by a decline in the labor force participation rate rather than substantive job growth. These conflicting signals require the central bank to exercise greater caution in assessing the economic outlook.

**Central Bank Maintains Cautious Stance**

The Bank of Canada has held rates steady at its two most recent consecutive monetary policy meetings, in line with broad market expectations. Central bank officials stated that the current rate level is appropriate and emphasized that the economy has shown resilience in navigating trade uncertainties. However, the bank also warned that uncertainty from areas such as trade policy remains elevated, and it stands ready to respond accordingly should the outlook change.