Bank of Canada preview: Scotiabank expects a 25 bp hike next week despite softer core CPI
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.
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.
How firms align with this view
Aligned with the desk view
Contrary positioning
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.
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.
Risks to this view
A decision to hold rates steady could significantly weaken the Canadian dollar, as it may signal the Bank's willingness to tolerate higher inflation. Additionally, if geopolitical tensions de-escalate, leading to lower commodity prices, this could diminish the urgency for further rate hikes.
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 major markets, reflecting that shift in pricing. Oil is central to the outlook: Scotiabank flags the risk of an escalation in the Iran war after the US midterms, which could push energy and commodity prices higher and add to Canadian inflation pressure.
Higher crude would normally support the Canadian dollar, but it would also strengthen the case for further tightening. If the Bank of Canada holds instead, the loonie would likely weaken, and markets could read the pause as a signal that policymakers are prepared to tolerate inflation near the top of the target range. - September’s inflation report gave the Bank of Canada a softer headline to point to, but Scotiabank argues that summer travel coming off is no reason to hold rates while the forward-looking risks keep building. Summary: Scotiabank expects the Bank of Canada to raise rates by 25 basis points at its meeting next Wednesday, 28 October.
Markets were pricing about 18 basis points of tightening after September CPI, unchanged from levels set after Governor Tiff Macklem’s weekend remarks. Headline CPI rose to 3.1% y/y in September, a tick below forecasts and at the top of the bank’s 1% to 3% target range. Core measures eased in September, but the bank says a sharp drop in travel prices was the main drag and smoothed trends remain warm.
Scotiabank sees a hike as insurance against upside inflation risks, including possible Iran war escalation, higher commodity prices and fiscal expansion. Business and consumer surveys and an Alberta vote are still to come before the decision. Scotiabank expects the Bank of Canada to raise interest rates by a quarter point at its meeting next Wednesday, arguing that underlying inflation remains warm enough to justify an insurance hike even after a softer-than-expected September price report.
Consumer prices rose 3.1% from a year earlier in September, up from 3.0% in August but a tick below forecasts. That leaves headline inflation at the top end of the central bank’s 1% to 3% target range. Core measures eased in the month, but Scotiabank said upward revisions to earlier data and the smoothed trend still point to persistent pressure, with its preferred three-month averages of the central bank’s core measures running at around 2.6% to 2.7% on an annualised basis.
The bank attributed much of September’s softness to a sharp drop in travel prices as the summer holiday season ended. Travel services prices fell by roughly a quarter on an annualised basis, and car rental prices by close to 40%, a fall far larger than the usual seasonal pattern. Scotiabank said such moves warrant caution over data quality and argued that a slump in travel spending is not a reason to keep rates on hold.
Sources & References
How we cover this story
Related news on this pair
Euro: Bullish tone persists against US Dollar despite French risks - Scotiabank
EUR/USD momentum remains upside-biased despite French political headwinds, suggesting positioning has price in near-term domestic risks.
Euro: Soft undertone but fair value higher against US Dollar – Scotiabank
Scotiabank's fair value EUR/USD assessment above current levels suggests downside risk to USD on valuation, though near-term momentum remains weaker.