Markets expect a Bank of Canada rate increase this Wednesday, largely on the strength of Governor Tiff Macklem’s remarks at the IMF meetings, where he flagged growing risks of broader and more persistent inflation. The signal deserves to be taken seriously. Yet the underlying data do not yet make a compelling case for tightening, and the costs of waiting appear modest relative to the risk of acting prematurely.
Inflation pressures remain narrow. Virtually all of the gap between headline inflation and the 2 percent target reflects fuel costs, while recent core CPI readings have been tame. This is not 2022: then, the labour market was at its tightest in decades, unemployment was a full percentage point below today’s level, and core inflation was already well above target. An energy-driven shock that could reverse, for example through a post-election arrangement that steadies oil flows from the Persian Gulf, does not clearly warrant slowing growth.
There is little evidence, however, that current settings are fuelling demand. Housing, the most rate-sensitive sector, is in recession, and higher bond yields are already lifting mortgage rates and weighing on home sales. Business investment lacks the AI-driven momentum seen in the US, and many major capital projects are unlikely to break ground before 2028.
Some have pointed to the rise in five-year-ahead consumer inflation expectations to 3.9 percent from 3.3 percent. However, consumers expected roughly 4 percent inflation throughout 2016–2019, when actual inflation held between 1 percent and 2 percent, and the Bank did not respond. The measure has a limited record as a policy guide.
Importantly, uncertainty should narrow soon. The weeks following the US midterms should clarify both the energy outlook and Canada–US trade relations, including whether the threatened 50 percent tariff on Canadian autos and parts after 2027-01-01 materializes. Should trade frictions intensify, the economy may need more support from monetary policy, not less.
Deferring the decision to December or January carries limited risk, while moving early could be a step the Bank comes to regret. On balance, the risks favour patience.
Independent Opinion
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