Bank of Canada: Tariffs reshape rate risks – NBC

National Bank of Canada's (NBC) Taylor Schleich and Ethan Currie expect the Bank of Canada (BoC) to keep its overnight rate at 2.25% and maintain current balance sheet policy. They argue markets still overprice late-2026 hikes, with risks skewed toward a Canadian Dollar-supportive rally in Government of Canada bonds versus U.S. Treasuries. Escalating U.S. trade policy and retaliatory tariffs are seen tilting risks toward a more cautious, data-dependent stance.

BoC seen on extended hold

“The Bank of Canada is set to leave its overnight target unchanged at 2.25%, a decision widely expected by forecasters and OIS markets. This would mark the seventh consecutive hold. We don't expect any changes to balance sheet policy.”

“Despite an escalating Canada-U.S. trade war, the impact on rate expectations has been relatively modest and implied odds of a late-2026 hike still hover near 65%. Investors appear to view a resolution of the conflict as likely because near-term hikes are incompatible with a prolonged trade war. We too are cautiously optimistic that cooler heads can prevail, but we dont see the implied rate trajectory as adequately capturing the balance of risks.”

“Even so, the repricing was modest and, in our view, markets still assign too much weight to near-term hikes. That leaves risks tilted toward a post-decision rate rally and GoC outperformance vs. U.S. Treasuries.”

“To be clear, we dont expect a cut. That one last March came when the policy rate was higher (3%) and the Bank was already in an established easing cycle. But citing monetary policy limitations and emphasizing data dependence could be a strategy employed this week.”

“Ultimately, what followed that March 2025 meeting was a six-month pause before a cut was delivered in September. If the trade war intensifies further and the economy again stalls, we may be in for a similar response and timeline...”