MNI BoC Review-March 2026 - Leans Dovish In Energy “Dilemma”

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EXECUTIVE SUMMARY - BOC Leans Dovish In Energy “Dilemma”

• The Bank of Canada’s March meeting came with the overwhelmingly expected rate hold (overnight rate at 2.25% for the 3rd consecutive meeting), as well as the anticipated focus on the new risks presented to the outlook from the conflict in the Middle East.
• In our view, while the overall messaging on rates was largely neutral, the BOC’s take on the impact of higher energy prices leans slightly dovish. The communications emphasized downside risks to growth, and Gov Macklem mused that without the energy price shock and associated inflationary pressures, the BOC might have been talking about cutting rates this year given weaker-than-expected growth and soft labour market data. In some ways that vindicated inter-market market pricing which ended February pricing in a slight easing bias through year-end on the back of softening data, but now prices in a hike by year-end.
• The press conference emphasized that the BOC would take its time to assess the war’s impact, and while it would look through near-term headline inflation increases, it would be looking carefully at core metrics to gauge whether there was an impact on broader price pressures. Macklem said “I don't think you measure this in weeks”, but the current assessment is that “the risk that higher energy prices are going to quickly spread to other goods and services looks contained” due in part to excess supply in the economy.

• Markets took the meeting fairly neutrally, with a slight dovish move in the June and July meeting-dated OIS implied rates, though volatility was more attributable to actual developments in the Middle East/energy prices on the day than to the BOC itself. At the conclusion of the press conference there were around 28bp of hikes priced through 2026, vs around 30bp prior to the decision, with a 25bp hike seen roughly by the October meeting.

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