Bank of Canada’s growth-inflation trade-off takes centre stage – RBC

Canada’s Q3 Business Outlook Survey points to a difficult balance between growth and inflation for the Bank of Canada (BoC) as its next decision approaches, according to Royal Bank of Canada’s (RBC) Claire Fan. Business conditions improved into August, but the collapse of Canada-U.S. trade talks subsequently weighed on sentiment as inflation expectations increased. Although RBC continues to forecast no rate hikes until 2027, it sees the risks as tilted towards earlier action.

BoC faces policy trade-off as fragile growth tempers inflation risks

"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 created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)