Bank of Canada: Pre-emptive hiking path – Standard Chartered

Standard Chartered economist Dan Pan analyzes the Bank of Canada’s 25bps rate hike to 2.5%, which came despite subdued core inflation and soft growth. The bank now expects another 25bps increase in December, taking the year-end rate to 2.75%, and sees the BoC pausing in 2027, with scope for further hikes if growth momentum is confirmed.

BoC front-loads insurance tightening

"The Bank of Canada (BoC) raised the policy rate by 25bps to 2.5% at its 28 October meeting; we had expected a pause. While consensus leaned towards a hike, many had considered such a move unnecessary amid subdued core inflation and soft growth. Nevertheless, the BoC showed a strong preference to hike pre-emptively in response to inflation risks."

"Forward guidance signalled potential for additional hikes but was non-committal. We think this signals that the BoC believes further tightening is needed to offset upside inflation risks, but may be reluctant to lock it in amid high uncertainty around the energy shock. We expect another 25bps hike in December, taking the year-end rate to 2.75% (2.25% prior), the midpoint of BoC’s neutral estimate."

"The BoC could opt for a hold in December if data shows continued labour-market deterioration in October and November. We expect core inflation prints to continue to run soft ahead of the December meeting, but that is unlikely to change BoC’s tightening bias. Absent a clear resolution of the Middle East conflict, the BoC will likely view high energy prices as adding to inflation risks and contained core inflation as temporary."

"We expect it to stay put in 2027 after delivering a total of 50bps hikes in 2026. The BoC might be open to further rate hikes later in 2027 if data confirms solid growth momentum. The central bank’s new model puts a heavy emphasis on energy cost transmission while downplaying the inflation impact of demand compression."

"We expect soft demand to keep broader inflationary pressure relatively contained, limiting the need to hike beyond the initial insurance hikes. Market pricing of over 85bps of hikes for the rest of the cycle remains excessive, in our view, especially given pre-emptive moves likely aimed at avoiding a steep hiking cycle."

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