Bank of Canada rate hikes to be limited by soft economy, report says — SkimNews
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- Capital Economics forecasts the Bank of Canada will raise rates to 2.75% via two quarter-point hikes next year — well short of the roughly 1.25 percentage points of total hikes markets now expect before the end of 2027.
- Bank of Canada has held its benchmark rate at 2.25% since last October as it gauges impacts of the U.S. trade dispute and Iran war, with its next interest rate decision scheduled for Oct. 28.
- U.S. tariffs and trade uncertainty, along with weak population growth and a soft labour market, are expected to rein in inflationary pressures and limit the degree of monetary tightening needed.
- Statistics Canada revised population data showed the population did not recently shrink on an annual basis as first thought, which Capital Economics suggests could push the federal government to tighten immigration levels further — a drag on household consumption and housing recovery.
- Canada's GDP stalled in July but likely picked up again in August; Capital Economics expects real GDP growth of just 1.5% next year, normalizing to 2% in 2028 as infrastructure and AI projects gain steam.
Why it matters: Capital Economics is calling for a shallower BoC tightening cycle than markets are pricing — 0.5 percentage points versus roughly 1.25. If trade headwinds and weak population growth actually keep inflation in check, Canadian borrowers could see less pain than feared, while savers waiting for higher yields may wait longer. The report's authors argue global bond yield rises are already doing some tightening work for the central bank.
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