TD Says Bank of Canada Has Some "Wiggle Room" to Deal With The Evolving Energy Shock

07:48 AM EDT, 03/23/2026 (MT Newswires) -- TD said last week's data releases and the Bank of Canada (BoC) statement described a world that could have been, with a domestic backdrop showing easing inflation.

The war in Iran has upended that, noted the bank. With escalatory strikes on energy infrastructure, oil prices remain high. All the focus is now on how big and persistent the energy shock will be -- with the prospect of stagflation looming.

It is unfortunate that households and businesses will face this new pinch because Friday's retail sales data in Canada sent some positive signals, stated TD. After a year of fits and starts, it looked like things were just starting to turn a corner. The expected surge in gasoline and energy prices in March will "muddy" the picture and likely eat into the real spending figures in the months ahead.

On the path of future inflation, last week's economic news came as a "silver lining," pointed out the bank. First off, it looked like inflation is going to start this shock from a pretty good place. Measures of near-term core inflation all showed signs of softening price momentum, suggesting that officials were well on track to meet the 2% target before the most recent shock.

Another major development happening in the background is the country's population turning modestly lower in 2025, added TD. On the surface, declining population should help to relieve pressure on housing markets and weigh on rental growth, putting further downward pressure on shelter inflation.

However, it is also leading to some tightening in labor supply, limiting spare capacity. On balance, the bank doesn't see labor demand improving much in the coming months, but a tighter labor supply will help to offset some rise in the unemployment rate.

A solid starting point for inflation and domestic excess capacity gives the Bank of Canada some "wiggle room" to deal with the evolving energy shock, according to TD. As a result, the bank sees core measures of inflation moving only modestly higher in the coming months, before moderating into 2027.

Absent a more meaningful softening in the economy, this is likely to keep the BoC on hold "indefinitely."

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