Overview
Bank of America economists led by Carlos Capistran expect the Bank of Canada to leave its policy rate unchanged at 2.25% for the remainder of the year. In their assessment, domestic economic fragility offsets the inflationary impulse from recent crude price increases tied to geopolitical tensions in the Middle East.
Monetary outlook and market pricing
The team writes that "The bar for the BoC to hike rates this year is quite high, and our baseline is that the BoC will remain on hold for the foreseeable future." They also note that current market-implied tightening of nearly 50 basis points appears driven by geopolitical risk rather than Canadian macroeconomic fundamentals.
Labour market and demand-side dynamics
Policymakers remain focused on the Canadian labour market, where job creation has been negative since 2025. Economists highlight that "demand-side weakness is the dominant force and is showing up in decelerating wage growth" across the private sector. That softer labour demand is a central reason the BoC can be patient despite higher energy prices.
Inflation and the output gap
Inflation dynamics had been well-anchored around roughly 2% for eighteen months prior to the recent conflict in Iran, according to the economists. That prior stability, they argue, gives the central bank scope to look through temporary price impulses from the crude price surge. Under the economists' projections, the output gap will remain negative as GDP growth tracks below long-term potential.
Trade, investment and the energy channel
Higher oil prices are a net positive for Canada as an exporter of energy, but the report cautions that trade uncertainty and U.S. tariffs continue to weigh on broader investment. These competing forces - an energy-driven trade benefit versus headwinds to investment - are part of the calculus keeping the BoC on hold in the assessment.
Conditions that could change the stance
Capistran and his team flag two scenarios that could compel the Bank of Canada to tighten: "a persistent and large shock that pushes inflation above 3% or Fed hikes." They add that unless inflation expectations become unmoored, the central bank is likely to prioritize support for a cooling domestic economy.
This analysis outlines the Bank of America economists' baseline: a held policy rate at 2.25%, with near-term market pricing reflecting geopolitical risk rather than domestic fundamentals.