Three big forecasters flipped on Monday. On Monday, the Bank of Montreal, Royal Bank of Canada and Desjardins Group shifted to predicting the benchmark will be set at 2.5% when policymakers convene on Oct. 28, a view shared by RBC's securities division.
Hours before those calls, Statistics Canada reported annual inflation quickened to 3.1%, softer than economists had expected. Traders largely looked through the miss and sold bonds across the curve.
Fresh business and consumer surveys from the central bank pointed to higher longer-term inflation expectations among households. For businesses, roughly half indicated intentions to relay some or all energy- and tariff-related cost increases to their customers.
Shelly Kaushik, an economist at the Bank of Montreal, wrote: "Despite this morning's milder-than-expected CPI report, inflation risks remain tilted to the upside given the trade war and still-elevated energy prices, with no end in sight to either shock."
Desjardins Group's Royce Mendes, who serves as head of macro strategy, added: "Central bankers can no longer look through the inflationary impact of high energy prices." He continued, "Businesses have faced elevated input costs for long enough that we now believe more broad-based consumer price increases are imminent. Consumers' longer-term inflation expectations have also risen to levels not seen since the worst of the Covid-era price hikes, reinforcing the need for action."
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Governor Tiff Macklem told reporters Saturday there was "no resolution in sight for the conflict in the Middle East," and noted that the conflict's run-up in energy costs is lifting exports, incomes, government revenues and investment.
By late Monday afternoon in Ottawa, pricing in overnight swaps suggested odds near four in five for a hike, up from close to seven in ten earlier that day and around three in ten a week ago. Following the data, Bank of Nova Scotia strengthened its call for a hike, while Manulife still projects two straight moves - one this month and another in December.
Derek Holt, Scotiabank's head of capital markets economics, said: "If a hike is significantly priced, then they're likely to deliver one since easing financial conditions by whiffing would be tough to justify."
Even with the shift in trading and forecasts, a recent Bloomberg economist survey still points to a hold next week. Policymakers have warned they may need to raise borrowing costs if energy prices stay elevated and if inflation pressures extend beyond gasoline into other goods and services.
The setup into Oct. 28 is straightforward: odds for a hike have climbed, several major desks now expect 2.5%, and the central bank's own surveys show rising longer-run inflation expectations with many firms preparing to pass through costs. One more wrinkle for positioning is that Manulife still sees another move in December even as the broader economist consensus looks for no change next week.
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