-- Steady fiscal policy was mirrored by the Bank of Canada's decision to leave the policy rate unchanged last week, emphasizing that the economy is evolving in line with expectations, said TD.
The accompanying Monetary Policy Report underscored that higher oil prices are pushing inflation higher in the near term, but, under the BoC's base-case assumption, these effects gradually fade as energy prices ease, noted the bank.
With some slack remaining in the economy and core inflation measures still close to target, policymakers indicated that patience remains warranted. A view TD has shared for some time.
That said, the BoC was clear that the outlook is highly uncertain. Ongoing tariff effects and uncertainty surrounding the upcoming CUSMA trade deal review continue to weigh on exports and investment.
Meanwhile, a more prolonged or severe energy shock could broaden inflation pressures, overturning the current assumption that higher oil prices are temporary, stated the bank. The BoC highlighted that "consecutive increases in the policy rate" could be needed should oil prices not fall as expected.
Looking ahead, the BoC faces a delicate balancing act, added TD. If trade disruptions intensify and global demand softens further, excess supply could widen, opening the door to eventual rate cuts.
On the other hand, if elevated energy prices prove more durable and begin to feed into broader inflation expectations, multiple hikes could be in the offing. "Wait and see" is the mantra -- for now -- but the clock is ticking, according to the bank.