TD Continues to See Bank of Canada on The Sidelines This Year

07:28 AM EST, 01/26/2026 (MT Newswires) -- The TSX equity index plunged early last week on tensions between Europe and the United States over Greenland, said TD.

It staged a relief rally, more than fully recouping those losses after President Donald Trump eased fears of military action in the region and a renewed trade war with Europe. Canadian bond yields were also volatile, flaring higher alongside the spike in Japanese bond yields and geopolitical tensions, before pulling back a touch, as cooler heads prevailed on the Greenland issue, noted the bank.

These events reinforced that Canada continues to deal in an uncertain economic backdrop, and this will likely be a factor restraining economic activity in 2026, stated TD. This uneasiness has certainly been weighing on consumer and business moods, and markets received fresh evidence of this impact last week with the latest Bank of Canada surveys on business and consumer confidence.

Although showing some improvement relative to early 2025, business sentiment continues to be "subdued." The uncertainty caused by the trade war continues to weigh on investment intentions, consistent with the pullback that the bank is seeing in the hard data. Consumers are also concerned about trade uncertainty, though actual spending remains decent.

Friday's retail spending report showed a healthy 1% monthly gain in volumes. And, although retail sales are tracking flat for Q4 overall, TD sees some upside risk to its Q4 consumption forecast, on the back of stronger services spending.

High prices were also a top concern for consumers in the BoC's latest survey. However, there was some good news on this front last week. The BoC's preferred core inflation metrics cooled in December, with the three-month annualized percent change for the CPI-trim and CPI-median both ducking under 2%. What's more, the share of items whose prices grew at 3% or more dropped when measured on the same basis -- signaling a narrowing breadth of inflation across categories.

However, the report wasn't a complete slam dunk, as overall inflation increased by more than expected on the back of stronger food prices.

Tying these threads together, last week painted a picture of a soft underlying Canadian economy with moderating inflation pressures that still faces significant uncertainty, according to TD. While this was enough for markets to slightly pare back their expectations of a rate hike later this year, the bank doesn't think it was enough to meaningfully shift the policy dial.

The BoC has repeatedly said that it's happy with the current policy stance, provided the economy evolves broadly in line with expectations. At 2.8%, core inflation landed almost bang-on the BoC's expectation for Q4 2025. Indeed, it would take a significant undershooting of economic growth or a meaningful softening in the labor market to force policymakers off the sidelines, added TD.

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