National Bank of Canada (NBC) economists Taylor Schleich and Ethan Currie argue that economic slack and contained core inflation have allowed the Bank of Canada to be patient, but sustained high Oil prices and a firmer growth backdrop now point to a rate hike. They expect a first increase since July 2023, with December odds near 50%.

BoC patience challenged by Oil

"Economic slack and contained core inflation has allowed the BoC to take a patient approach this year. But as officials have repeatedly stressed, the longer energy prices remain elevated, the greater the risk that inflation broadens. The Governor was clearly uncomfortable with WTI at ~$90/bbl in early September, so another 10-20% increase in the interim has likely exhausted their patience. "

"While trade uncertainty may be weighing on the growth outlook, the BoC has faded these risks lately. Macklem has stressed that the economy is on better footing, firms are adapting, and more recently, he’s drawn attention to the positive economic benefits that higher oil prices are providing. A reportedly imminent trade deal should also assuage some lingering concern. "

"This all leans toward the BoC delivering its first increase since July 2023."

"Assuming the Bank does opt to tighten, the focus will shift to the timing of the next one. Supporting a consecutive move in December will be upgraded inflation and growth projections in a new MPR and an empirical record that sees the Bank typically begin its cycles with back-to-back hikes."

"However, other central banks have opted (the ECB) or are likely to opt (the Fed) for a more gradual approach. We don’t see this being a ‘dovish hike’ whereby the Bank sets up a December hold. However, they also won’t explicitly ‘tee up’ a follow-on move. Instead, they’ll frame the outcome of future decisions around incoming data and the evolving balance of risks."

"That’s likely to see markets place the odds of a December hike around 50% following the decision"

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

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