Bank of Canada: Is the growth-inflation trade-off taking centre stage? – RBC

Weaker sentiment and rising inflation expectations have made the Bank of Canada’s (BoC) growth-inflation trade-off more difficult ahead of its next decision, according to Royal Bank of Canada’s (RBC) Claire Fan, citing the Q3 Canadian Business Outlook Survey. Business conditions had improved into August, but sentiment deteriorated after Canada-U.S. trade talks broke down. RBC continues to expect no rate hikes until 2027, although it sees the risks tilted towards earlier increases.

How will the BoC balance fragile growth and inflation?

"The Q3 Business Outlook Survey highlights the increasingly contentious growth-inflation trade-off confronting the Bank of Canada ahead of its upcoming policy decision."

"Odds for an October BoC rate hike rose significantly over the weekend following Governor Macklem's hawkish comments."

"But this morning's September CPI data showed core inflation measures averaging 1.9%, while the separate consumer survey suggested weaker spending intentions ahead."

"We continue to see fragile economic recovery as the biggest counterweight to heitened inflation risks, and expect caution from the BoC, especially when rising bond yields are already tightening financial conditions and raising borrowing costs for businesses and households."

"Risks to our base case forecast of no rate hikes until 2027 are tilted toward earlier moves – including potentially as early as next week’s Decision."

(This article was prepared with assistance from an Artificial Intelligence tool and reviewed by an editor. Learn more.)