Bank of Canada: Rates Seen on Hold Then Higher – TD Securities

TD Securities analysts project that the Bank of Canada will maintain its current policy rate before implementing a hike later in 2025, according to a recent client note. The forecast, which cites persistent underlying inflation and a resilient domestic economy, suggests the central bank will prioritize data confirmation over a rapid easing cycle.

What is driving TD Securities’ forecast for a rate hold?

The primary factor behind the ‘hold then higher’ call is the Bank of Canada’s need to balance cooling headline inflation against sticky core price pressures. While the Consumer Price Index has moderated from its 2022 peaks, shelter costs and wage growth remain elevated, giving policymakers reason to pause. TD Securities argues that the central bank will likely keep the overnight rate steady at its upcoming meetings to assess the full impact of previous hikes before shifting to a restrictive bias.

Market expectations versus TD’s projection

Current market pricing suggests a split among investors, with some anticipating a rate cut by mid-2025. However, TD Securities’ view diverges, positing that the Bank of Canada will be forced to respond to a rebound in economic activity. The firm’s economists point to strong population growth and government spending as demand-side pressures that could reignite inflation, necessitating a policy tightening later in the year. This projection implies a potential yield curve steepening for Canadian government bonds, as short-term rates may rise while long-term growth expectations remain tepid.

Why this matters for borrowers and investors

For Canadian households and businesses, the difference between a hold and a hike has significant financial implications. Variable-rate mortgage holders have already faced substantial payment shocks since 2022. A prolonged hold offers temporary relief, but the prospect of a future hike means borrowing costs could stay higher for longer than many anticipated. For investors, this forecast signals a need to position portfolios for a potential strengthening of the Canadian dollar and a headwind for equity sectors sensitive to interest rates, such as real estate and consumer discretionary.

Conclusion

TD Securities’ projection of a steady policy rate followed by an increase underscores the uncertain path of Canadian monetary policy. The central bank remains data-dependent, and upcoming inflation and employment reports will be critical in determining whether this forecast materializes. For now, the message is clear: the era of ultra-low interest rates remains a distant memory, and the potential for further tightening persists.

FAQs

Q1: When is the Bank of Canada’s next rate announcement?
The Bank of Canada typically announces its policy rate decisions on a fixed schedule, with the next announcement expected in early 2025. The exact date is published on the central bank’s official website.

Q2: How does a rate hold affect the Canadian dollar?
A rate hold, especially if accompanied by a hawkish tone, can support the Canadian dollar as it suggests the central bank is not yet ready to ease monetary policy. However, the currency’s value is also influenced by global commodity prices and the US Federal Reserve’s actions.

Q3: What is the current target for the overnight rate?
The Bank of Canada’s target for the overnight rate is set after each policy meeting. As of late 2024, the rate stands at 3.75%, following a series of cuts. TD Securities’ forecast implies this rate will remain unchanged before a potential increase later in 2025.