BofA Securities has substantially revised its outlook for Canadian monetary policy, now forecasting that the Bank of Canada will remain on hold through 2026 rather than deliver the two 25-basis-point rate reductions it had previously expected.
The decision to alter the forecast is rooted in a pronounced move in energy markets coinciding with the start of the U.S.-Israel "Epic Fury" military operation in Iran. In a research note released Monday, BofA economist Carlos Capistran highlighted the magnitude of the market reaction.
"Oil prices have increased more than 30% since the conflict started,"
Capistran's assessment frames the rise in crude as a dual force: it can provide a countervailing lift to Canada's domestic economy while also transmitting additional price pressure into the broader inflation profile. That combination complicates the central bank's trade-offs and underpins BofA's more cautious policy projection.
"the geopolitical shock has introduced clear upside risks to growth and inflation,"
That inflationary pass-through from higher energy costs is a key reason BofA now expects the policy rate to remain at 2.25% through the end of the year. While the firm notes that underlying domestic growth remains soft, the effect of rising crude has raised the hurdle for any near-term easing moves.
Beyond the direct macroeconomic implications, BofA's report suggests the conflict could alter regional trade dynamics in ways favorable to Canada. The note points to strategic considerations that may emerge in negotiations under the United States-Mexico-Canada Agreement.
"The US is unlikely to want multiple fronts open simultaneously, while secure energy supply from Canada becomes even more strategically valuable,"
Market reactions have not been uniform. Oil prices fell sharply on the same day after U.S. President Donald Trump signaled that military objectives were being met "very soon." The president described the U.S. and Israeli strikes on Iran as a "tremendous success right now," while also warning that the U.S. "could go further."
Despite the elevated near-term risks linked to the geopolitical shock, BofA does not expect the Bank of Canada to pivot to active rate increases. The bank believes the central bank will prefer a cautious "wait and see" stance so long as longer-term inflation expectations remain anchored.
Key facts and projections outlined by BofA in its note remain centered on the 2.25% policy rate, the removal of two anticipated 25-basis-point cuts, and the assessment that higher oil prices create upside risks to both growth and inflation for Canada.