Canadian Dollar: Oil risks bolster case for further BoC hike – Commerzbank

Norman Liebke at Commerzbank reports that the Bank of Canada raised rates to 2.5% and signalled a data-dependent approach. Inflation is projected above target until mid-2028, with growth risks centred on US tariffs but supported by energy investment. Elevated Oil prices and potential spillovers into broader inflation could justify another BoC hike, underpinning the Canadian Dollar.

BoC hike keeps CAD underpinned

"The Bank of Canada raised interest rates to 2.5% yesterday. The move had been priced in by the market with an 80% probability, which is why the CAD barely moved following the decision. Although the Bloomberg consensus was not entirely unanimous, the latest estimates had also increasingly pointed towards a rate hike. Broadly speaking, Governor Macklem reiterated his more recent hawkish comments on the inflation outlook, while the inflation forecasts were, unsurprisingly, revised significantly higher."

"According to the new projections, the BoC now expects inflation to average (somewhat) over 3% in the fourth quarter of 2026 as well as in 2027 overall. Although the BoC does not publish quarterly forecasts for 2027 apart from the fourth quarter, it appears that inflation will only fall back below 3% in the second half of the year. The 2% inflation target is not expected to be reached again until mid-2028."

"Given currently high oil prices, however, there is a reasonable case that another rate increase could become necessary if the feared price pressures increasingly spill over into non-energy components. As things stand, oil prices look set to remain elevated for the time being as, according to the WSJ, there is a risk of another escalation by the US in the Middle East conflict following the midterms. Should this materialise, there is currently a strong case for another rate hike in December."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)