National Bank of Canada analysts Ethan Currie and Taylor Schleich expect the Bank of Canada to keep the overnight target rate at 2.25%. This would be a fourth consecutive hold.
They expect the Bank to repeat that policy is appropriately calibrated. They expect policymakers to look through a war-related spike in headline Consumer Price Index (CPI) inflation because core inflation remains soft.
Inflation Outlook And Core Trends
The update may include a higher all-items inflation outlook due to higher petrol prices. Core inflation projections are expected to change only slightly.
Gross Domestic Product (GDP) growth projections may be trimmed modestly. This follows weaker-than-expected Q4 2025 results, below-estimate tracking for Q1 2026, and an underwhelming labour market.
The Bank may state that risks to growth lean lower, while risks to inflation lean higher. The piece notes it was produced using an Artificial Intelligence tool and reviewed by an editor.
We expect the Bank of Canada to hold its key interest rate at 2.25%, continuing the pause that began back in October 2025. This decision is widely anticipated, with overnight index swaps showing virtually no chance of a rate change at the next meeting. The market has correctly removed the pricing for rate hikes in 2026 that we saw earlier in the year.
Market Strategy And Currency Implications
The latest inflation data from March 2026 supports this steady policy, even though it creates a confusing picture for the market. While headline CPI remains elevated at 3.8% due to the war’s impact on gasoline prices, core measures which the Bank focuses on are behaving well, sitting just below target at 1.9%. This divergence allows the central bank to justify its patient stance and look through the temporary energy shock.
Economic growth figures confirm the Bank’s cautious approach and provide a reason to bet against rate hikes. The disappointing 0.5% annualized GDP growth we saw in the fourth quarter of 2025 has been followed by weak job numbers, with Canada adding only 10,000 jobs last month and the unemployment rate rising to 6.3%. This underlying softness suggests the next move from the Bank is just as likely to be a cut as a hike, although not for several months.
For derivatives traders, this stability in the front-end of the yield curve suggests selling volatility is the primary strategy for the coming weeks. Selling options on CORRA futures that expire in the next one to two months could be profitable as the Bank is unlikely to signal any policy shift. However, the skewed risks of lower growth and higher inflation warrant buying longer-dated options as a cheap hedge against an eventual, more dramatic policy change later this year.
This policy divergence is also creating a tug-of-war for the Canadian dollar. The Bank’s dovish stance is a headwind for the currency, but elevated oil prices, with WTI holding firm around $95 a barrel, are providing significant support. This conflict suggests using FX options to trade a range-bound USD/CAD, as the currency will likely struggle for direction until one of these major forces gives way.
