With a hike close to fully priced, the Canadian dollar’s reaction will likely turn on the Monetary Policy Report and forward guidance rather than the decision itself. A hold would be a sizeable surprise, likely sending the loonie sharply lower and pulling short-dated Canadian yields down. A hike signalling further tightening would support the currency and push the front end higher, while a “one and watch” message could see pricing for a follow-up move by March trimmed. Oil is the external wildcard: higher crude both lifts Canadian headline inflation and supports the commodity-linked loonie, so further energy price gains would reinforce the hawkish case. Friday’s August GDP data could then quickly test whatever guidance the bank delivers.
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Busy week ahead (and I haven’t even mentioned the elephant in the room yet!)
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A week ago the Bank of Canada looked set to sit tight, but one hint from Governor Macklem about higher inflation forecasts has put a first hike in a year firmly on the table.
Summary:
- The Bank of Canada announces its decision on Wednesday, with markets pricing an 81% chance of a 25bp hike to 2.50%, which would be its first move in a year
- A Reuters poll found 19 of 34 economists expect a hike, and a majority see one more by March 2027; the previous poll had 80% expecting a hold through 2026
- Governor Tiff Macklem said the bank’s inflation forecasts are likely to be revised higher, remarks markets read as a signal of tightening
- HSBC says survey data, notably rising long-term consumer inflation expectations, point to a hike despite soft hard data
- TD does not share the market’s conviction, citing limited inflation breadth and near-term uncertainty
- The decision and Monetary Policy Report are due at 09:45 ET (13:45 GMT); August GDP follows on Friday
The Bank of Canada is expected to raise interest rates for the first time in a year on Wednesday, with markets pricing an 81% chance of a 25 basis point increase that would take its key policy rate to 2.50%, although some economists remain unconvinced the move is warranted.
Expectations have shifted rapidly. A Reuters poll conducted from October 21 to 23 found that 19 of 34 economists now forecast a hike this week, and a majority also expect one more increase by the end of March 2027, taking the rate to 2.75%. That marks a sharp reversal from the previous poll, when 80% of respondents expected the bank to hold at 2.25% through the end of 2026.
The catalyst was Governor Tiff Macklem, who told reporters that the bank’s quarterly inflation projections, to be published alongside Wednesday’s decision, are likely to be revised higher. Markets took the comments as a hint that tightening is coming, and futures pricing for an October hike jumped from around 30% before the remarks to roughly three in four, according to Reuters. Many economists switched their calls from a hold to a hike over the following week.
HSBC analysts said recent survey data suggest a hike is likely, pointing in particular to a rise in long-term consumer inflation expectations, even though other hard economic data have been on the soft side.
Not everyone agrees. TD analysts said they do not share the market’s conviction that rates will rise, citing limited breadth in inflation and uncertainty over the near-term outlook. Others have argued that energy-driven price increases are unlikely to feed through to underlying inflation on their own, while still expecting the bank to tighten if price pressures broaden. Weakness in the labour market earlier in the autumn had also led markets to push back expectations for a move toward December.
The decision and the accompanying Monetary Policy Report are due at 09:45 ET (13:45 GMT) on Wednesday. With a hike largely priced, the bank’s updated forecasts and guidance on further tightening are likely to drive the market reaction. August GDP data, due on Friday, will offer an early test of the outlook.
This article was written by Eamonn Sheridan at investinglive.com.