The Bank of Canada's inflation dilemma
Canada's economy is weak, but inflation is rising. The Bank of Canada has to choose which problem to take on. Raising interest rates will weaken the economy further while lowering rates would make inflation worse. The central bank decides what to do on Wednesday.
Goldman Sachs anticipates two interest rate hikes from the Bank of Canada by January 2027. The first increase of 25 basis points is expected at their October meeting, followed by another 25 basis point rise in January. This forecast change comes after Governor Macklem's recent comments and the central bank's Q3 economic outlook.
Though the current market consensus expects no hike, Goldman Sachs believes a 80-85% chance of a rate increase is reasonable. They argue the risk of inflation becoming persistent has risen, while core inflation remains near 2% and within the BoC's target. However, they caution that market pricing for cumulative tightening is overly hawkish.
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