Bank of Canada: Pre-emptive tightening takes centre stage – RBC

Sufficient slack remains in Canada’s economy to curb inflation, according to Royal Bank of Canada economists Frances Donald and Nathan Janzen. Nevertheless, they flag a possible 25 basis point rate rise by the Bank of Canada on Wednesday, with December or January still an alternative. In their assessment, policymakers appear more prepared to take pre-emptive action against future inflation risks.

BoC considers when to raise rates

"In our view, the case for the central bank continuing to wait on the sidelines remains compelling. The Canadian economy is improving, but still not strong. There is sufficient slack, in our view, that will slow inflation passthrough ."

"Yet, communication ranging from the Sept. 2nd rate decision to Governor Tiff Macklem’s comments recently on the sidelines of the International Monetary Fund meetings repeatedly conveyed—whether intentionally or not—that the BoC no longer believes it can wait passively for inflation to materialize before acting. This shift seems to reflect a recalibration of the central bank’s risk calculus."

"While we don’t see an immediate need for the BoC to hike now, at the same time, a 25-basis-point increase in the overnight rate on Wednesday won’t materially change our medium-term economic outlook compared to a December or January hike. Although it slightly increases the odds of a growth slowdown in Q4, particularly in heavily interest rate sensitive sectors like housing, our base case forecast already assumed 100 basis points of increases in 2027, contingent on a gradually improving economy."

"Ultimately, the signal of a rate hike on October 28th has a larger meaning we shouldn’t ignore: Central banks do not have the same patience for inflation they might have had in the past, and are willing to act preemptively to guard against it."

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