CIBC Suggests Bank of Canada Rate Hike Case Weaker Than Fed's

CIBC Capital Markets economists argue that the Bank of Canada's case for a rate hike on October 28 is weaker than the Federal Reserve's, despite growing market expectations. Helen Lao, an economist at CIBC, points out that while both countries face energy shocks from the Iran conflict, Canada's inflation is primarily driven by fuel prices, unlike the broader inflation problem in the US.

Canada's consumer price index (CPI) rose 3% year over year in August, with about 0.8 percentage points attributed to higher gasoline prices and an additional 0.3 points from airfares and travel costs. Only 38% of Canada's 55 major CPI components are rising faster than 3% annually, compared to about half of the categories in the US personal consumption expenditures (PCE) gauge.

CIBC expects the Fed to deliver one more rate hike and suggests Canada could follow suit in 2027, depending on domestic inflation trends and trade uncertainties. Meanwhile, Royal Bank of Canada (RBC) economists Nathan Janzen and Claire Fan describe the Bank of Canada's decision as finely balanced, with incoming data and communications from the central bank suggesting a close call for the October decision.

The next key signal will come on October 19, when Statistics Canada publishes September inflation data, with UBS predicting the annual rate to reach 3.3%. For variable-rate clients, a quarter-point increase would directly impact the prime rate, currently at 4.45%, while fixed-rate borrowers are already feeling pressure from rising bond yields.