Bank of Canada: Rabobank Flags Risk of Further Tightening

Further Bank of Canada rate increases remain a possibility after an energy-driven inflation shock prompted a hike, according to Rabobank's Senior Macro Strategist Bas van Geffen. Governor Macklem presented the decision as a way to limit the risk of price pressures spreading more widely, while inflation forecasts were revised markedly higher for this year and 2027. With the policy statement indicating that further tightening may be necessary, strategists anticipate another rate hike in December.

Will the Energy Shock Prompt Further BoC Rate Hikes?

"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."

(An editor reviewed this article, which was produced with assistance from an Artificial Intelligence tool. Find out more.)