Canadian Dollar: Inflation risks and rate path – RBC

Royal Bank of Canada (RBC) economist Abbey Xu notes Canadian inflation edged up to 3.1% year-over-year in September, slightly below consensus. Core measures such as Consumer Price Index (CPI) excluding food and energy and the Bank of Canada’s (BoC) CPI-trim and CPI-median remain near 2%. Xu highlights that policymakers face a soft economy but rising inflation risks from Oil, with the base case keeping rates on hold through 2026.

BoC balances soft growth and Oil risks

"The Bank of Canada is still facing an uncomfortable balance."

"Softer labour-market data and higher fixed borrowing costs give policymakers room to remain patient."

"At the same time, policymakers remain alert to the risk that persistently elevated oil prices lift inflation expectations or generate broader second-round price pressures."

"Our own base-case forecast assumes that the Bank will hold the overnight rate unchanged through the remainder of 2026 before gradually raising rates in 2027."

"However, recent communication from the Bank of Canada and Governor Macklem are denoting more urgency than the data to date might suggest and add to the risk the Bank chooses to move preemptively."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)