Capital Economics Sees Limited Bank of Canada Rate Hikes Amid Trade and Immigration Headwinds
A Capital Economics report forecasts the Bank of Canada will raise its benchmark interest rate by only a cumulative half-point to 2.75 per cent, well below market expectations, as trade uncertainty and slowing immigration constrain economic growth.
A report published Wednesday by Capital Economics argues that trade uncertainty and slowing immigration levels could restrict how high the Bank of Canada’s benchmark interest rate goes next year. The central bank has held its benchmark rate at 2.25 per cent since last October.
Capital Economics forecasts the Bank of Canada will raise rates to 2.75 per cent through a pair of quarter-point hikes starting next year, representing a cumulative increase of half a percentage point. This outlook contrasts sharply with financial markets, which currently expect roughly 1.25 percentage points of total rate hikes before the end of 2027. High oil prices have stoked fears of persistent inflation, shifting financial markets toward favoring earlier rate hikes.
Several factors are expected to limit monetary policy tightening. Tightening immigration levels could drag on household consumption and stall housing market recovery, while a soft labour market helps contain inflation from wage growth. Additionally, recent rises in global bond yields are helping tighten financial conditions, reducing pressure on the central bank to hike.
On the economic front, Statistics Canada reported Tuesday that growth stalled in July but likely picked up again in August. Revisions from the agency also showed that the population did not recently shrink on an annual basis as first thought. Capital Economics expects real gross domestic product to rise just 1.5 per cent next year and normalize to 2 per cent in 2028.
Prime Minister Mark Carney has an aggressive infrastructure agenda, though efforts to attract private investment are expected to gain steam toward the end of 2027 at the earliest.
The Bank of Canada is scheduled to issue updated forecasts for the economy and inflation at its next interest rate decision on Oct. 28.