KPMG Canada Forecasts Single 25-Basis-Point Bank of Canada Rate Hike in December
KPMG Canada has revised its outlook to predict a single 25-basis-point rate hike at the Bank of Canada's December 9 meeting, bringing the benchmark lending rate to 2.5 per cent. The shift follows a nearly 100-basis-point rise in Canadian bond yields over the past year, driven largely by Governor Tiff Macklem's hawkish September comments on energy prices.
KPMG Canada has changed its forecast from expecting no near-term interest rate increases to predicting a single 25-basis-point hike at the Bank of Canada’s December 9 meeting. The move would raise the benchmark lending rate to 2.5 per cent, where KPMG expects it to remain for the foreseeable future.
Ali Jaffery, chief economist at KPMG Canada, said bond markets are demanding policy credibility in response to inflation threats stemming from the energy crisis and debt issues in the United States, France, and Japan. Rising bond yields are imposing a premium on Canada, while an increasing spread between U.S. and Canadian rates is devaluing the Canadian dollar, potentially accelerating inflation.
On Monday, the Government of Canada five-year bond yield was nearing four per cent, almost 100 basis points higher than a year ago. Nearly 40 per cent of that recent increase occurred last month. Jaffery traced much of the surge—amounting to a 40-basis-point increase—to Bank of Canada Governor Tiff Macklem’s “tough talk” during the September 2 rate announcement press conference, where Macklem indicated that high energy prices posed a greater threat to the economy than U.S. tariffs.
Karl Schamotta, chief market strategist at Corpay Inc., noted that yields are tracking oil prices more closely than inflation. This suggests central banks are responding to oil benchmarks rather than core price measures, indicating that bond markets are shifting focus from core inflation to commodity prices like oil and that central bank reaction functions appear to have shifted accordingly.
KPMG’s December timeline differs from forecasts issued by several other institutions. Economists at Bank of Nova Scotia, UBS AG, Manulife Financial Corp., and Oxford Economics Ltd. are currently predicting a rate hike at the earlier October 28 Bank of Canada meeting.