Canadian Dollar: Why are rate-hike odds climbing as energy bolsters the economy? – Commerzbank

Market expectations of a Bank of Canada rate hike on 28 October have risen sharply, according to Commerzbank’s Norman Liebke, after Governor Macklem highlighted stronger support from high oil prices and the likelihood of upward revisions to inflation forecasts. While recent headline inflation readings have exceeded earlier BoC projections, surveys indicate that price expectations remain elevated, even though evidence of price pressures spreading more widely is limited.

Will the BoC tighten pre-emptively to contain inflation risks?

"A rate hike by the Bank of Canada (BoC) at the end of October has suddenly become a realistic scenario for the markets again. The probability of a rate move at the upcoming meeting on 28 October rose from 36% to more than 75% on Monday morning. The trigger appears to have been comments by BoC Governor Tiff Macklem, who spoke on Saturday at the annual IMF and World Bank meetings in Bangkok."

"Accordingly, Macklem expects the BoC to revise its inflation forecast higher at the end of October. The key question now is whether inflation will return towards the target on its own or whether a rate hike will be required. The BoC had already indicated that it could raise rates if energy prices remained high and inflationary pressure increasingly spread from gasoline prices to other goods and services."

"The key question is whether the BoC will raise rates pre-emptively now in order to get ahead of these risks, or whether it will prefer to wait until the impact of the renewed trade conflict becomes visible in the data and core inflation also starts to respond."

"A rate hike as early as the end of the month may still appear premature at this stage. If the BoC shares this assessment, it could take a little longer before monetary policy provides renewed support to the CAD, while the interest-rate differential widens further in light of the Fed’s rate hikes."

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