CIBC Sees Bank of Canada Staying Pat, Fed Set for Rate Hike

CIBC Capital Markets has pushed back against market expectations for multiple rate hikes from the Bank of Canada, suggesting that the central bank can afford to keep interest rates on hold until 2027. The firm's reasoning is based on weak economic momentum and trade uncertainty, which it believes will limit the risk of sustained inflation.

CIBC expects Canadian core inflation measures to remain close to the Bank of Canada's 2% target, while economic slack should continue to weigh on prices. The bank also notes that Canada's relatively limited exposure to higher fuel costs gives policymakers more room to wait.

However, CIBC warns that the threat of further U.S. trade measures, including a proposed 50% tariff on autos and parts from January, could further weaken Canada's economic outlook. Additionally, the firm remains cautious about the Canada-U.S.-Mexico trade agreement, which it believes remains at risk due to ongoing sectoral tariffs imposed by Washington.

Against this backdrop, CIBC expects the Bank of Canada to 'talk sternly' about its willingness to respond if inflation remains above target but defer actual rate increases until after the turn of the year. The bank also expects the Federal Reserve to raise interest rates by 25 basis points next week, citing rising oil prices and the risk of broader inflation pressures.