Bank of Canada: Preemptive tightening focus – RBC

Royal Bank of Canada economists Frances Donald and Nathan Janzen highlight the possibility of a 25 basis point Bank of Canada rate hike on Wednesday, while acknowledging that December or January remains an alternative. They argue the Canadian economy still has sufficient slack to restrain inflation, but note that policymakers appear increasingly willing to act preemptively against future inflation risks.

BoC weighs timing of rate hikes

"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."