Bank of Canada Hold Expected Through 2026 as Market Tightening Bias Looks Premature, National Bank Says

This week's Labour Force Survey (LFS) for June will provide another update on Canada's jobs market, but National Bank of Canada Capital Markets said it doesn't expect the data to significantly alter the Bank of Canada's outlook. With ongoing uncertainty around United States-Mexico-Canada Agreement negotiations weighing on the economy, a broad-based recovery is unlikely in the near term in Canada, wrote National Bank in a Thursday note. As a result, the BoC is expected to maintain a balanced policy stance, leaving both rate hikes and cuts on the table. With growth subdued and inflation pressures contained, market pricing has pushed the timing of rate hikes further out, added National Bank. The Overnight Index Swap pricing, which points to around 50bps of tightening over the next year, remains consistent with a gradual return toward neutral rates by mid-2027. However, the bank said it believes expectations for near-term rate hikes are premature, with policy rates unlikely to move higher until early 2027. The LFS for June is due out on Friday. Canada's central bank is scheduled to release its next policy statement on Wednesday.