Rabobank flags risk of further Bank of Canada tightening

2027 inflation projections have been raised notably, as have those for this year. Rabobank's Senior Macro Strategist Bas van Geffen reports that persistent energy-driven inflation prompted the Bank of Canada to raise rates. Governor Macklem presented the increase as a step to contain the risk of price pressures spreading more broadly. With the policy statement indicating that further rate rises may be necessary, strategists expect another hike in December.

BoC Raises Rates as Energy Shock Fuels Inflation

"Elsewhere, concerns about the energy shock elicited a rate hike from the Bank of Canada, which had held off from responding to energy price shock until yesterday. Governor Macklem explained that this move is to contain the risk that persistently high energy costs spread more broadly into consumer prices: “the combination of higher-for-longer energy prices and increased pass-through adds to the persistence of inflation in the projection.”"

"Indeed, the Bank of Canada raised its inflation projections substantially. It now forecasts 2.9% inflation this year instead of 2.5%. Moreover, the central bank’s economists added a whopping 1.1 percentage points to their 2027 forecast, lifting the inflation estimate from 2.0% to 3.1%."

"Unsurprisingly, then, the policy statement closes with the comment that “there could be a need to increase the policy rate further,” which suggests that this may not have been a one-and-done hike. Our Canada strategists have therefore pencilled in another rate hike in December."

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