Cautious hold as energy risks build – TD Securities

TD Securities, led by Robert Both and colleagues, expects the Bank of Canada to leave the policy rate at 2.25% in March. The statement is projected to stay cautious, balancing softer Canadian growth and moderating core inflation against upside inflation risks from higher Oil prices linked to the Iranian conflict. Guidance is seen keeping all options open on future rate moves.

BoC seen on cautious steady hold

“We look for the Bank of Canada to hold rates unchanged at 2.25% in its March policy decision, where the Bank faces two contrasting views of the world. In one, the domestic outlook has seen a mild deterioration since the January MPR, with softer Q4 GDP/Q1 tracking and the recent moderation across the Banks preferred core inflation measures. However, the other viewpoint is one of renewed geopolitical instability and the risk of sharply higher energy prices, with knock-on effects to headline inflation and domestic growth.”

“We believe the path of least resistance is for the Bank to maintain its recent messaging while acknowledging new risks from the Iranian conflict. The January policy statement already leaned heavily into heightened uncertainty, more so around US trade policy than geopolitics, but the current situation in the Middle East will introduce even more uncertainty around the previous outlook. However, the implications of the current conflict are more one-sided; if sustained, this environment will introduce substantial upside risk to the Banks inflation forecast, while the positive terms of trade shock helps offset the impact of ongoing trade uncertainty on growth.”

“We look for the Bank‘s guidance to repeat that the current policy rate remains appropriate to help the economy through a period of structural adjustment, while the opening statement to Governor Macklem’s press conference repeats that it remains ”difficult to predict the timing or direction of the next change in the policy rate.“ Rate cuts become a more challenging proposition in an environment of sustained pressure on global energy prices, but we think its too early for the Bank of Canada to take cuts off the table, with the $38 intraday decline for WTI crude on March 9th illustrating how quickly conditions can change.”