- The market was pricing in a 78% chance of a rate hike
- Prior overnight rate was 2.25%
- Says inflation is higher and more persistent than in the July Report
- global economic activity has remained resilient, despite higher energy prices
- Growth has picked up this year and is expected to recover further
- There could be a need to increase the policy rate further, but given uncertainties, Governing Council agreed to proceed carefully
The last line there is the key one, is a dovish hike as they characterize it as a hike to “reduce the risk of the continuing high energy prices” spreading broadly. USD/CAD is little moved on the knee-jerk.
In his opening statement, Macklem said:
Looking ahead, Governing Council agreed we would take future decisions one meeting at a time. There could be a need to raise the policy rate further, but given the uncertainties, we will proceed carefully.
The market had priced in a 32% chance of a second hike this year and I would now lean against that but this chart from the MPR shows what has the Bank of Canada worried.
The report identifies rising prices for chemicals, plastics, rubber products, semiconductors and computer components as some product prices that are rising.
The last move from the Bank of Canada was a cut to 2.25% in October 2025 in the culmination of cuts down from a peak of 2025 in the post-covid inflation surge.
Today’s decision comes with updated quarterly forecasts. Macklem warned earlier this month that inflation forecasts will be “quite a bit higher” than in July.
Here are the new inflation forecasts:
- 2026: 2.9% vs 2.5% prior
- 2027: 3.1% vs 2.0% prior
- 2028: 2.2% vs 2.1% prior
GDP:
- 2026: 1.0% vs 0.7% prior
- 2027: 2.0% vs 1.8% prior
- 2028: 2.0% vs 1.8% prior
The 2027 CPI forecast is the problematic one but
Running against the Bank of Canada’s hawkishness have been some surprisingly soft economic numbers, including the last two jobs reports. In contrast, indications of consumer spending have remained robust and higher commodity prices are a tailwind. The Canadian housing market has been struggling for two years and prices are continuing to slide in much of the country.
Worth reading is the key part of Macklem’s statement, which lays out in plain terms the debate the Bank of Canada is thinking about:
Against this backdrop, Governing Council considered two policy options: hold or hike.
The main argument for holding was that the rise in inflation has so far been concentrated in energy prices and in services that rely heavily on energy inputs, such as airfares. CPI inflation excluding gasoline is still 2.2%, and measures of core inflation remain close to 2%. In addition, while growth has been better than expected, economic slack remains, and new US tariffs will weigh on growth.
The main argument for an increase was that energy prices are higher, they are expected to remain higher, and cost pressures are building. As we’ve been saying for some time, the longer energy prices remain high, the more likely it is these costs will spill over to consumer prices more broadly.
The prices of gasoline, diesel and heating oil are considerably higher than in July and are expected to remain higher for longer. This is hitting consumers directly and raising business costs for production and transportation. Imported industrial and electronics input prices have also increased. While businesses have mostly absorbed higher input costs so far, past experience and Bank surveys suggest that cost pass-through will increase over the next year. The combination of higher energy prices and pass-through increases the persistence of inflation. In addition, with the economy expected to recover, there is less downward pressure on prices to offset these cost pressures.
In short, tell me what happens with the Iran war and I’ll tell you what happens with rates next.
This article was written by Adam Button at investinglive.com.