When the Bank of Canada announced its surprise rate cut in January, central bank chief Stephen Poloz characterized the sudden move as an insurance policy against falling oil prices, and not one meant to suggest that anything “drastic” was otherwise happening to the economy.

Even so, he allowed that the central bank has sufficient scope to take out more “insurance,” should events warrant it.

Since then, the so-called smart money has piled into the bet that the bank will lower its benchmark overnight rate again at its next meeting on March 4. Futures data aggregated by Bloomberg imply an 87.5% probability that the Bank of Canada (BoC) will cut its short-term rate by 25 basis points, to 0.5% from 0.75%.

In fact, traders are betting the easing will continue even beyond that. A majority now expect the bank to lower rates once more at its July meeting. The data imply a 57.3% chance of another cut of at least 25 basis points, which would take the overnight rate to 0.25%, which was where it bottomed at the height of the Great Recession.

Although the bank formally abandoned forward guidance last October, in a speech this week before the Quebec Technology Association, BoC Deputy Governor Agathe Cote seemed to be signaling that the bank’s rate bias is decidedly downward.

In her remarks, she observed that the collapse in crude oil prices and their continuing volatility could cause inflation to “dip into negative territory for a brief interval.”

In recent weeks, there have been plenty of dramatic actions undertaken by the world’s central banks to counter disinflation or outright deflation, and similarly any move by the BoC will ultimately be predicated on where it sees inflation trending.

After all, in contrast to his predecessor Mark Carney, the “rock star” central banker who now helms the Bank of England, Poloz is more of a traditionalist when it comes to policymaking. That means that while he’s often addressed other economic matters in his remarks, including the exchange rate, manufacturing exports and business investment, his primary focus is maintaining a low, stable rate of inflation.

Since 1991, the BoC has been mandated by law to target a 2% inflation rate. Inflation is allowed to range from 1% to 3%, with the bank’s policymaking intended to guide inflation back toward the midpoint over a period of six quarters to eight quarters, which is roughly the amount of time it takes changes in interest rates to flow through the economy.

Given this lag between monetary policy and its intended effect, inflation expectations play a major role in monetary policy.

When we write about inflation expectations, most folks’ eyes probably start glazing over. But Cote made an excellent point that unlike a weather forecast, which has no bearing on what the actual weather will be, inflation expectations cause real people—households, businesses, and, yes, the Bank of Canada–to make economic decisions today based on their expectations of future purchasing power.

After a brief, but worrisome drop below the lower bound of the target range in late 2013, Canada’s consumer price index (CPI) recovered and spent eight months at or slightly above the 2% target in 2014. But in December, according to Statistics Canada (StatCan), the CPI plunged by half a percentage point month over month, to 1.5%.

And the BoC expects the CPI to continue declining through the second quarter, bottoming out just above zero or, as noted earlier, actually going negative. That may sound like deflation, but Cote reminded us that a negative CPI alone is not sufficient to constitute deflation. Rather, there would have to be a generalized decline in prices for deflation to be truly unfolding.

Among the factors putting downward pressure on inflation, the bank sees a continuing output gap, where weak demand has kept actual output well short of the economy’s full potential capacity; intense price competition between retailers; and now falling oil prices.

But Cote says that with inflation expectations of businesses and consumers firmly anchored to the target range, as recent surveys have shown, policymakers believe there’s little danger of the sort of psychology that could turn a brief dip into negative territory into a deflationary spiral.

That reassurance aside, the BoC believes the net impact of the oil price shock will be significant.

In the January issue of Canadian Edge, we cited the research of Lutz Kilian, a professor of economics at the University of Michigan and an expert on oil price shocks, who told the Canadian Investment Review that economists tend to overestimate the impact of oil price shocks.

Could that be the case this time around? While Canada’s energy sector is a prominent part of the country’s investment story, the resource space contributed just 8.1% to the country’s gross domestic product (GDP) in 2013.

Still, that doesn’t account for how the wealth the sector generates flows through the economy. For instance, by some estimates, the energy sector accounts for roughly one-third of non-residential investment in Canada.

And Cote described a number of different ways in which crude’s crash will have negative repercussions for the broad economy, concluding that in the absence of easing household incomes would decline by 3% by the end of next year, while half a point would be knocked off inflation.

To be sure, there are benefits to falling crude prices, especially when consumers pay lower prices at the pump and then reallocate that spending toward other areas. But the BoC says these benefits will be more than offset by the aforementioned challenges.

Despite this gloomy outlook and its seeming tilt toward another rate cut, during a question-and-answer session that followed her remarks Cote hedged that the bank’s monetary policy is not predetermined, but based on a careful examination of the data. However, it certainly sounds like what they’re seeing, by their own standards, merits another rate cut.