CIBC argues Bank of Canada has weaker case for rate hike than Fed

The Bank of Canada has a weaker case for raising interest rates compared to the U.S. Federal Reserve, according to CIBC. The Canadian economy's softer inflation pressures, primarily driven by gasoline prices, and overall economic slack are helping to keep broader price increases in check.

CIBC economist Helen Lao noted in an Oct. 6 report that the Fed’s recent quarter-point hike has led to expectations of a similar move by the Bank of Canada. However, she highlighted key differences in the inflation landscapes of the two countries. Only 38% of Canadian consumer price index components are rising faster than 3% annually, while roughly half of the categories in the Fed’s preferred personal consumption expenditures measure are experiencing similar increases.

CIBC estimates that higher-than-average gasoline prices contributed about 0.8 percentage points to Canada’s one-percentage-point inflation overshoot in August. Additional fuel-related increases in airfares and travel tours added further pressure, though economic slack partly offset these effects. Lao suggested that easing fuel costs could bring Canadian inflation closer to its target, whereas U.S. inflation faces broader pressures from tariffs, AI-related spending, and excess demand.

CIBC anticipates another Fed hike and believes the Bank of Canada could follow in 2027, though trade uncertainty and weaker growth will influence the timing. Lao emphasized that the timing of Canada’s rate hike decisions will be shaped by domestic factors, calling it a ‘made-in-Canada story.’