UBS Shifts to Rate Hike Expectations as Inflation Surpasses BoC Target

UBS Global Research is now forecasting two successive 25-basis-point interest rate increases by the Bank of Canada, starting in October. This marks a shift from their previous stance that hikes would not come until next year.

The change in outlook follows a tone shift from Bank of Canada Governor Tiff Macklem, who indicated that upside risks to inflation are increasing and Canadian businesses appear to be adapting to trade war pressures.

Macklem's comments suggested the Bank is becoming less tolerant of above-target price growth. UBS economist Abigail Watt noted that the Bank's language shift suggests it will no longer look through high inflation while waiting for clearer evidence of domestic demand pressure.

Other forecasters, including Manulife and Oxford Economics, have also moved up their timeline for rate hikes, anticipating increases in October and December. However, Royal Bank of Canada economists expect the BoC to hold its policy rate steady before beginning a gradual hiking cycle in early 2027.