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UBS Expects Bank of Canada to Hold Rates Through 2026, Begin Hiking in H2 2027

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The Bank of Canada is expected to remain on hold this year and hike rates in the second half of 2027, despite a more optimistic tone from policymakers on the domestic economic outlook, according to a UBS Global Research note.

UBS acknowledged in the note published for the media on Thursday that growth could improve and broaden toward the end of the year and into 2027.

However, the bank remains cautious about ongoing uncertainty surrounding the US-Mexico-Canada Agreement review, which has effectively shifted toward a trade deal renegotiation process and introduces additional risks for the outlook.

Wednesday's BoC "statement was updated to reflect the recent better news on the economy and the potential for inflation to ease despite uncertainty in the outlook," wrote UBS economists in the note.

The bank added that Governor Tiff Macklem's Wednesday comments suggest the BoC doesn't see an immediate risk from demand-driven inflation pressures, highlighting the economy's continued "considerable excess supply" and the challenge of balancing elevated inflation risks with weak growth.

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