TD Securities: Bank of Canada Holds Rates at 2.25% Through 2026, Then Hikes in 2027

TD Securities analysts say the Bank of Canada has adopted a more hawkish stance on interest rates, indicating that inflation risks outweigh core inflation. According to their analysis, the Overnight Rate will remain at 2.25% through 2026 before moving up to an assumed neutral rate of 2.75% in 2027 via two 25-basis-point increases.

The Bank of Canada's decision was influenced by recent spikes in oil prices above $100 per barrel and the introduction of Section 338 tariffs on August 22. Despite these pressures, headline inflation is currently hovering near the top of the 1-3% target range.

TD Securities advises derivative traders to prepare for a prolonged pause at 2.25% through the rest of 2026, recommending Canadian Overnight Repo Rate Average (CORRA) futures to position for flat policy rates over the next three months.