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Capital Economics: Canada's soft economy should limit Bank of Canada rate hikes
Capital Economics said October 1 the Bank of Canada will likely raise rates only to 2.75% next year — well below market pricing of 75–125 bps of hikes; the Bank updates its forecasts October 28.
Why it matters
Trade uncertainty and slowing immigration will likely rein in Canada's growth prospects and limit how far the Bank of Canada needs to raise interest rates, according to a new Capital Economics report published October 1.
Full report
The report forecasts the central bank will raise its benchmark rate to 2.75% with a pair of quarter-point hikes starting next year — the middle of the Bank of Canada's neutral range. That is well below market pricing, which currently expects roughly 75 to 125 basis points of total hikes before the end of 2027.
The Bank of Canada has held its benchmark rate at 2.25% since last October while it gauges how the U.S. trade dispute and the war in Iran are affecting its outlook. It will issue updated economic and inflation forecasts at its next rate decision on October 28. Recent rises in global bond yields are also tightening financial conditions, easing pressure on the central bank to hike.
Markets, however, are leaning toward tightening: Scotiabank notes the Bank dropped its reference to the policy rate being "appropriate" and warned that upside risks to inflation have increased, making the October meeting a "live" one for hike risk.
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