Bank Of Canada Likely To Hike Again After Today's Move

(MENAFN- ING) BoC to proceed carefully after hike

The Bank of Canada has raised its target for the overnight rate by 25bp to 2.5%. Ahead of the meeting, it was about 80% priced by markets, with economists split down the middle on whether we would get a hike or not – the Canadian outlook is improving, but inflation is in line with target and the recent jobs numbers have been disappointing with the unemployment rate rising to 6.5%.

The statement justifies the action on the basis that the recent growth figures have been stronger than anticipated thanks in part to "solid" consumer spending, while business capex in the oil and gas industry has rebounded on higher energy prices. They also note that sectors that had been heavily impacted by US tariffs have strengthened.

In an environment of rising cost pressures, which so far have been largely absorbed by businesses, there is a sense that cost pass-through could be more of a theme for 2027. As such, inflation could be more persistent than previously thought likely. Given this situation, the BoC concluded that "there could be the need to increase the policy rate further..." but they will "proceed carefully".

Market expectations still too hawkish

Markets are currently seeing the next meeting in December as a 50:50 call on whether we get another hike. Right now our forecast is for the BoC to hike rates to 2.75% in the first quarter of 2027 (our preference is January over March) and hold them steady, but the risk is that they go a little more aggressively, and we see a December hike followed by a 1Q27 move.

Anyway, we still judge market expectations for 90bp of tightening over the next 12 months as overly hawkish. The BoC has a central estimate for the neutral rate around 2.75%, and we agree with their estimate that second-round effects will be present but overall contained, especially in terms of wage growth spillover.

Source: ING, Refinitiv

"> CAD outlook is very oil-dependent

In the near term, elevated oil prices risk prompting an upward surprise in inflation and leading markets to price in a December hike. The BoC can accommodate this. This adds to the weight that oil prices have on CAD's near-term outlook. We remain on the more bearish side of the oil story, and think a decline in energy prices could lead to broad dovish repricing and release pressure on the BoC to hike in December.

We remain unconvinced that CAD can draw much more benefit from the domestic story, and only see USD/CAD trading steadily below 1.40 should USD-related risks build up. Our target for year-end for the pair remains unchanged, with some upside risks to 1.420.

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