Bank of Canada to Hold Fire Despite Oil Price Shock

According to Ethan Currie of National Bank of Canada, the Bank of Canada is likely to remain on hold in October despite increased oil-driven inflation risks. The bank's focus on preventing second-round inflation effects means that policymakers are cautious and will tighten policy only when growth and inflation risks evolve.

The market has brought forward expectations for policy tightening, with OIS pricing around four BoC hikes by June 2026. However, Currie argues that this path may be somewhat overstated relative to underlying fundamentals. The bank's tightrope walk between preventing second-round effects on inflation and allowing the economy to grow is a delicate one.

The Bank of Canada has consistently prioritized inflation risks over growth, which explains why CB pricing has been closely tied to crude prices. With ~300 bps of tightening expected from major central banks over the next 9 months, markets have priced in eventual action from the BoC. However, Currie believes this may be slightly overextended for the Bank.