The Bank of Canada is widely expected to hold its policy rate at 2.25% for the remainder of 2026, driven in part by elevated geopolitical tensions and trade uncertainty that BofA Securities believes will keep the central bank from moving toward easing.
In a note from BofA Securities, economist Carlos Capistran emphasized that recent developments in energy markets - specifically price rises following military operations in Iran - have created material upside risks for the Canadian economic outlook. "Higher oil prices increase growth and inflation in Canada, so it goes against rate cuts," Capistran said, describing how shifting commodity dynamics counteract pressures for policy loosening.
Those commodity effects are significant against a domestic backdrop that has shown signs of softness. The Canadian economy registered a GDP contraction in late 2025, a signal of weakness that, under normal circumstances, might point toward easier monetary policy. BofA notes, however, that stronger crude prices act as a structural offset to that weakness, blunting the argument for cutting rates.
Monetary authorities are expected to reflect this complexity in their communications. BofA anticipates the Bank of Canada will adopt a cautious tone in its upcoming forward guidance to preserve flexibility should conditions shift again. That approach would allow the bank to respond to either an acceleration in inflation from higher energy costs or renewed domestic slippage.
The labour market adds another layer of nuance. January data were mixed: headline unemployment edged lower, but the composition of that improvement raised questions. As Capistran observed, "the unemployment rate fell to 6.5%, but this was driven by a drop in labor‑force participation rather than genuine job creation." That pattern complicates how policymakers interpret labour market slack and its implications for wage and price pressures.
Inflation readings present a further mixed picture. Core measures continue to trend toward the central bank’s target, yet headline inflation remains vulnerable to energy-price shocks. BofA calculates that a sustained 10% rise in oil prices would increase headline inflation by roughly 40 basis points, a non-trivial effect that has already begun to influence market expectations.
Indeed, market pricing has shifted away from earlier bets on rate relief. BofA highlights that because of the positive fiscal impulse from higher oil revenues and the broader economic response to stronger crude prices, "The Canadian economy typically benefits from higher oil prices, and we now see the balance of risks shifting from BoC cuts in '26 to potential hikes," Capistran wrote. That reassessment reflects how external shocks can reweight the trade-offs facing the Bank of Canada.
With these cross‑currents in place - geopolitical risks, oil-driven inflationary pressure, a mixed labour market, and recent GDP softness - policymakers are likely to prioritize optionality, keeping the policy rate steady while monitoring incoming data closely.