BoC: Growth, energy and cut risks – TD Securities

TD Securities analysts see the Bank of Canada balancing trade uncertainty, higher Oil prices and domestic demand. They say GDP must run above potential to avoid disinflationary risks and rate cuts, and that Q1 data will be pivotal. Energy-driven growth and inflation could help keep policy on hold, but consumer and fiscal trends remain more important.

Growth and Oil shape BoC outlook

"For the BoC to remain on hold this year, GDP growth needs to be above potential. Growth that is merely at potential implies persistent negative supply, creating disinflationary risks down the line – which would call for cuts."

"In that sense, Q1 data is hugely important. We don't necessarily need to see growth in line with the BoC's forecast of 1.8% in the January MPR, but anything materially below 1.0% would raise questions about the current policy setting. We have plenty of time for Governor Macklem's argument that monetary policy shouldn't necessarily respond to structural weakness in the economy, but it is still appropriate for the Bank to respond to cyclical shocks in this environment."

"The January 2026 MPR assumed $55/bbl WTI, so if oil prices hold near current levels ($75/$80 for WTI/Brent) it would conceivably add 0.4-0.5 p.p. to the BoC's baseline growth trajectory. It would also lift the Bank's inflation profile by a similar magnitude, leaving headline CPI sitting near 2.5% by Q4."

"This sort of incremental boost to growth would be enough to comfortably keep the Bank on the sidelines in a tight decision, but we'd emphasize that the energy price story is still probably less important than the outlook for government spending or the health of the consumer. We would also expect the Bank of Canada to look through any headline inflation shock if higher energy prices do not spill over into core measures."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)