Canada: Contained inflation pressures support steady BoC – RBC

Royal Bank of Canada (RBC) economist Abbey Xu reports that Canada's inflation remained at 3% year-over-year in August, with food and energy components still high but showing signs of easing. Core measures, such as the Consumer Price Index (CPI) excluding food and energy and the Bank of Canada's CPI-trim and CPI-median, are close to the 2% target.

Xu believes this supports the expectation that the Bank of Canada will maintain interest rates steady until 2026, followed by gradual rate hikes in 2027. While persistent oil strength could push risks towards earlier tightening, core inflation pressures have remained contained. Limited evidence suggests elevated energy costs are causing significant second-round inflation.

As long as oil prices stay elevated, the breadth and persistence of underlying price pressures will be more important than month-to-month changes in headline inflation. The August report aligns with the base case that the Bank of Canada will keep rates unchanged through 2026 before gradually increasing them in 2027 as the economy improves.

During the Asian session on Monday, the AUD/USD pair reached a one-and-a-half-week low near 0.7140, while spot prices for USD/JPY climbed closer to the 154.00 level, reversing some of Friday's losses. Gold showed increased upside momentum, approaching the $4,300 mark, but remained restrained by stronger US Dollar and higher US Treasury yields.

Bitcoin also rose, hovering around $77,884, alongside other cryptocurrencies. For the dollar to continue its upward trend, Fed officials must satisfy current hawkish expectations, as indicated by the updated dot plot.