Oil prices have rebounded more than 30% since the start of July as Middle East tensions escalated, pushing rate expectations higher across major economies, though Bank of Canada expectations have risen only modestly, National Bank of Canada said in a Friday note.
The BoC has been relatively insulated, with December 2026 rate expectations rising only five basis points, compared with a full rate hike priced in for both the Bank of England and European Central Bank, said the bank in its note.
"The relationship between oil prices and BoC policy expectations has weakened of late, while remaining strong elsewhere," wrote National Bank in the note. "The inflationary implications of higher oil prices have been offset by domestic developments."
Softer domestic inflation, a more dovish BoC stance and renewed US tariff uncertainty have kept near-term tightening expectations contained, added the bank.
Markets still see Canada's central bank on hold at least through October, with hikes largely pushed into 2027, said National Bank.
While the bank expects rate hikes to begin in the first quarter of 2027 as economic slack diminishes, National Bank sees the policy rate peaking below current market expectations.