Brown Brothers Harriman sees Bank of Canada tightening expectations exceeding fundamentals despite stable inflation and economic slack.
Markets have priced in over 50bps of Bank of Canada rate hikes within twelve months, pushing the policy rate to 2.75%. Analysts argue this is excessive given contained underlying inflation and persistent economic slack, with the output gap estimated at -1.5% to -0.5% through Q1 2026.
Canada’s labor market shows mixed signals, with April’s jobs report expected to add 10.0k positions following March’s 14.1k gain. However, employment has contracted by an average of 31.5k over the past three months, suggesting subdued growth despite improved hiring intentions.
Firm crude oil prices provide a positive terms-of-trade shock, offsetting potential CAD weakness from reduced rate hike expectations. The currency remains supported even if swaps pricing adjusts downward.