Bank of Canada rate hike expectations have moderated significantly since the last auction on hopes for a permanent peace deal in the Middle East and ongoing weakness in Canadian economic data, said National Bank of Canada.
Most notably, last week's gross domestic product report delivered a significant downside surprise and revealed that the economy was in "technical recession" around the turn of the year, noted the bank.
While National Bank would push back against the recession characterization, it's clear there is slack in the economy, and it expects that to persist in the near future.
Soft domestic conditions will continue to lean against the spike in headline inflation and should assuage some of the BoC's concerns that energy inflation could "broaden" into the prices of other goods and services, stated the bank.
National Bank estimates the BoC to reiterate a patient stance in its policy decision next week and still sees the Canadian central bank remaining on the sidelines through the end of the year.
However, the bank doesn't predict market expectations for a tighter BoC policy to be fully priced out, as the risk profile remains skewed toward rate hikes rather than cuts.