Bank of Canada: RBC highlights growth-inflation trade-off

RBC expects no rate hikes until 2027. However, risks point towards earlier action. Royal Bank of Canada’s (RBC) Claire Fan says the Q3 Canadian Business Outlook Survey highlights the difficult trade-off between growth and inflation facing the Bank of Canada (BoC) before its next policy decision. Business conditions improved into August. However, the collapse of Canada-U.S. trade talks subsequently weakened sentiment, while inflation expectations rose.

BoC faces growth-inflation policy trade-off

"The Q3 Business Outlook Survey highlights the increasingly contentious growth-inflation trade-off confronting the Bank of Canada ahead of its upcoming policy decision."

"Odds for an October BoC rate hike rose significantly over the weekend following Governor Macklem's hawkish comments."

"But this morning's September CPI data showed core inflation measures averaging 1.9%, while the separate consumer survey suggested weaker spending intentions ahead."

"We continue to see fragile economic recovery as the biggest counterweight to heitened inflation risks, and expect caution from the BoC, especially when rising bond yields are already tightening financial conditions and raising borrowing costs for businesses and households."

"Risks to our base case forecast of no rate hikes until 2027 are tilted toward earlier moves – including potentially as early as next week’s Decision."

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