Energy shocks prompt U.S. banks to revise expectations of the Bank of Canada's rate cuts

Investing.com - Bank of America Securities has fully revised its outlook on Canadian monetary policy, now expecting the Bank of Canada to keep interest rates unchanged until 2026. This shift cancels the previous expectation of two 25 basis point rate cuts, as geopolitical volatility is reshaping the North American economic landscape.

The revision stems from a sharp escalation in energy markets following the U.S. and Israel’s “epic fury” military action against Iran. Bank of America economist Carlos Capistran noted in a Monday research report, “Since the conflict began, oil prices have risen over 30%.”

The expected rise in crude oil prices will provide a conflicting boost to Canada’s weak domestic economy while also increasing price pressures. Capistran observed, “Geopolitical shocks pose significant upside risks to growth and inflation,” complicating the central bank’s policy path.

Bank of America analysts now expect the policy rate to remain at 2.25% until the end of the year. Despite weak domestic growth, inflationary pass-through from energy costs has raised the threshold for recent easing policies.

The bank’s report also suggests that the current conflict could unexpectedly strengthen Canada’s position in regional trade discussions. Capistran wrote regarding US-Mexico-Canada Agreement negotiations, “The U.S. is unlikely to want to fight on multiple fronts simultaneously, and secure energy supplies from Canada have become more strategically valuable.”

However, after U.S. President Donald Trump hinted that military objectives would be “achieved soon,” oil prices plummeted today. He described the U.S. and Israel’s strikes on Iran as “a huge success so far,” while warning that the U.S. “may go further.”

Despite increased risks, Bank of America does not expect the Bank of Canada to shift toward active rate hikes. As long as long-term inflation expectations remain stable, the institution may lean toward a cautious “wait-and-see” approach.

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