Bank of Canada preview: Scotiabank expects a 25 bp hike next week despite softer core CPI
At a Glance
The desk believes that the Bank of Canada will implement a 25 basis point hike at its upcoming meeting, influenced by persistent inflationary pressures and geopolitical risks. Despite a recent easing in core CPI, Scotiabank emphasizes the potential for inflation to accelerate, particularly due to rising energy prices and supply chain disruptions stemming from the Iran conflict, as detailed in their recent commentary . Markets are currently pricing in about 18 basis points of tightening, suggesting a modest expectation of a hike but leaving room for fluctuation in the Canadian dollar and front-end yields ahead of the decision.
Key Takeaways
- 01The Bank of Canada is expected to raise rates by 25 basis points next week.
- 02Inflation pressures related to energy prices are a key focus for the BoC.
- 03Market pricing currently reflects about 18 basis points of anticipated tightening.
- 04Geopolitical risks could further amplify inflation, impacting policy decisions.
Full Analysis
What the desk is arguing
The desk posits that a 25 basis point hike from the Bank of Canada is likely, underscored by ongoing inflation concerns and external risks. Per the full note, the Bank’s recent CPI data showed a slight dip to 3.1% year-on-year, leaving the inflation target range still at risk given the likelihood of increased commodity prices as geopolitical tensions rise.
Moreover, the desk notes that while softer core CPI readings could imply a more cautious approach, Scotiabank asserts that the underlying inflation dynamics remain robust, and any significant fall in rates could signal a tolerance for higher inflation. This view is echoed by expectations that higher commodity prices, particularly oil, may push inflation beyond desired thresholds.
Where it sits in our coverage
Our consensus target for USD/CAD stands at 1.075, with a range between 1.04 and 1.12. Notable projections from firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This framework places the desk’s forecast at a midpoint, suggesting a more cautious outlook aligns with Scotiabank's stances emphasizing the likelihood of inflation pressures.
How other firms see it
Overall, firms like jpmorgan and scotiabank are aligned on expecting a rate hike, while bofa takes a more contrary stance suggesting a stable or decreasing trajectory for rates. The potential escalation in commodity prices could influence movements across pairs like USD/CAD and AUD/CAD, making them particularly sensitive to the outcome of the BoC meeting.
What the calendar says
The next key event is the Bank of Canada meeting on October 28, where the decision on interest rates is set to be announced. This decision will likely act as a catalyst for further adjustments in market positioning and currency valuation.
Market Implications
Traders should monitor the upcoming Bank of Canada meeting closely, particularly the decision and accompanying guidance, as this could lead to significant movements in the Canadian dollar. A break above 1.08 in USD/CAD may signal increased volatility in response to the BoC's actions.
From the original
With markets pricing about 18 basis points of tightening, a hike next week is the base case but not fully locked in, leaving room for the Canadian dollar and front-end yields to move on the decision and guidance. Canada’s two-year bonds have been the weakest front end among the m
Related speeches
4 itemsBank of Canada likely to hike again after today’s move
The desk sees potential for the Canadian dollar (CAD) to strengthen following the Bank of Canada's (BoC) recent rate increase. The BoC raised its policy rate by 25 basis points to 2.5%, indicating that this move is not likely to be an isolated hike, as policymakers express concerns over persistent inflationary pressures (per the full note [source]). Current market pricing shows a 50% chance of another hike in December, although the desk expects that any further tightening will materialize no earlier than the first quarter of 2027. This cautious but growth-oriented approach by the BoC aligns with favorable consumer spending data, propelling the outlook amid rising energy prices.
Bank of Canada preview: Scotiabank expects a 25 bp hike next week despite softer core CPI - investingLive
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