BoC Holds Steady as Fed Prepares for Rate Hike Amid Oil Price Surge

Resurging oil prices are adding to inflation worries for both Canada and the United States. The Bank of Canada (BoC) is expected to hold interest rates until 2027, but risks are tilting towards earlier hikes due to a strong economy and labour market.

The Federal Reserve, on the other hand, is now expected to hike rates in September, with two additional hikes this year to effectively reverse the 75 basis points of rate cuts in 2025. This decision is driven by an upside inflation surprise in August and historically low unemployment rates.

Canada's economy has some remaining slack, but core inflation remains well anchored around 2%. In contrast, the U.S. economy is starting from a strong position with growth above 2% and a tight labour market. This means the Fed has less flexibility to wait for elevated oil prices to turn into bigger inflation problems.