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Bond Market Less Convinced That Bank of Canada Has Greater Flexibility on Oil-Induced Inflation, Says Desjardins

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Policymakers at the Bank of Canada have made clear that higher energy prices alone are unlikely to trigger action, unless oil prices remain elevated for a prolonged period and inflationary pressures broaden out, said Desjardins.

Yet Canadian fixed income continues to trade closely with oil prices, suggesting that markets still attach meaningful weight to the single inflation mandate and terms-of-trade benefits, noted the bank.

As a consequence, the risk of hikes later this year cannot be ruled out, but it remains "conditional," stated Desjardins. Canada may be best placed to absorb the shock, but its bond market is still trading as though oil is a cleaner macro positive than the BoC itself appears to believe.

The bank's forecast continues to see the BoC on hold this year, which should bring mortgage rates down later in 2026.

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