Traders and economists are increasingly expecting the Bank of Canada to raise interest rates at its next meeting, following central bank surveys that showed inflation expectations rising. The Bank of Montreal, Royal Bank of Canada and Desjardins Group all changed their forecasts on Monday, saying that officials led by Governor Tiff Macklem are likely to lift the benchmark rate to 2.5% at the Oct. 28 meeting. RBC's securities unit also said it expects a hike.
Earlier Monday, Statistics Canada reported that inflation accelerated to a 3.1% yearly pace, slightly below expectations in a Bloomberg survey. Markets shrugged off the release, and bonds sold off across the curve. By late afternoon in Ottawa, traders in overnight swaps put the odds of a hike at 80%, up from nearly 70% earlier in the day and around 30% a week ago.
Shelly Kaushik, an economist with the Bank of Montreal, said inflation risks remain tilted to the upside given the trade war and still-elevated energy prices. The central bank's business and consumer outlook surveys found that households' longer-term inflation expectations are rising, and roughly half of firms plan to pass along some or all of their cost increases to customers. Royce Mendes, head of macro strategy at Desjardins Group, said central bankers can no longer look through the inflationary impact of high energy prices.
Bank of Nova Scotia firmed up its call for a hike after the data release, and Manulife still forecasts back-to-back increases, this month and in December. Despite growing bets on a hike, a recent Bloomberg survey consensus points to a hold next week. The Bank of Canada has warned it may need to raise borrowing costs if energy prices stay elevated and inflation pressures spread to other goods and services.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing