Canadian Dollar: BoC rate hike pricing appears overdone - Standard Chartered

Market pricing points to a much steeper tightening cycle than Standard Chartered economist Dan Pan anticipates, with Pan expecting the Bank of Canada (BoC) to hold its policy rate at 2.25% through end-2026 and 2027. In Pan’s view, weak domestic demand, muted core inflation and labour market weakness limit the case for aggressive rate increases, even if the central bank delivers an insurance hike in October.

Will the BoC hold rates despite mounting market pressure?

"We expect the BoC to stay put despite rising market pressure for rate hikes as early as this month Soft domestic demand and subdued core inflation show little risk of inflationary pressure broadening It is likely to be a close call given the BoC emphasises forward-looking inflation risks and policy setting Even with an October insurance hike, market pricing of the total tightening cycle is excessive, in our view."

"We now expect the Bank of Canada (BoC) to stay put at 2.25% until end-2026 and 2027 (versus a cut in 2026 and a hike in 2027 previously). High oil prices have lowered the likelihood of a near-term rate cut, but sustained economic slack and contained underlying inflation still make a case for the BoC to look through near-term energy price shocks."

"An October hike would be justified by caution, not necessity, in our view. BoC Governor Macklem’s comments since the September meeting emphasise forward-looking inflation risks and the central bank’s willingness to act early."

"While the BoC may deliver one or two hikes in early 2027 if core inflation picks up, we see no strong growth catalyst to justify the 100bps of rate hikes the market has priced in."

"A bullish investment outlook, driven by high commodity prices and AI adoption, could take time to lift growth, while the economy continues to struggle with lingering trade uncertainty."

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