Leading up to this week, the odds of an additional Bank of Canada rate hike were basically a coin toss.

But weak data released over the past week have essentially “sealed the deal” for another rate hold, economists say.

“This week’s data sealed the deal, with the BoC’s Business Outlook Survey weakening sharply and September inflation surprisingly tame,” BMO’s Benjamin Reitzes wrote.

“The latest data suggest that the weakness seen through most of the first half of the year continued into the second half,” he added. “While inflation remains too high, there’s been a steady deceleration which can be expected to continue given the soft economic backdrop.”

Last week, weak retail sales data confirmed the moderating demand, which is expected to temper inflation going forward.

Personal consumption is expected to be “anemic” in the third quarter, growing by just 1-1.5%, according to TD Economics’ Maria Solovieva.

“The balance of risks for the Canadian economy is slowly swinging to the downside as consumer confidence continues to be soured by the Bank of Canada’s rate hikes and elevated inflation,” Solovieva wrote.

Bond markets are now pricing in over 90% odds of a rate hold tomorrow. Looking ahead to the December monetary policy meeting, markets currently see a 28% chance of an additional rate hike, although much data will be released prior to then.

What the forecasters are saying…

On inflation:

• BMO: “The level of inflation remains much too high for comfort, but the trend is the BoC’s friend here. Given that inflation is the most lagging of indicators, and the economy is clearly weakening, we’re likely to see ongoing disinflationary pressure…there’s no need for further rate hikes in Canada.”
• CIBC: “Even though the Bank’s core measures of inflation remain too high for their liking, some of the details within [the latest inflation] report, combined with the stall in economic activity seen during Q2 and Q3, should give policymakers comfort that inflation will continue to ease back to 2% without the need for further interest rate hikes.”

On GDP forecasts:

• National Bank: “…there are no signs of a recovery in the months ahead, with consumer and SME confidence now at levels seen only during recessions…no less than 43% of the impact of rate hikes has yet to be felt on consumption. This is enormous, especially as households are already showing signs of running out of steam. Against this backdrop, combined with the tightening of financial conditions triggered by the global rise in long-term interest rates, we continue to anticipate economic lethargy over the next twelve months. We forecast growth of 1.0% in 2023 and 0% in 2024.”

On rate-cut expectations:

• Desjardins: “Many mortgage holders will renew in 2025 and 2026 at higher interest rates than the rock-bottom levels they locked in at five years earlier. The question is how much higher. Should central bankers truly want to avoid cooling the economy too much, they’ll need to reduce interest rates before hitting that wall of renewals…Eventually, the Goldilocks goal should also allow them to begin trimming rates in 2024.”
• BMO: “We’ve reduced next year’s total rate cuts to 50 bps from 75 bps on both sides of the border. This reflects the theme of ‘higher for longer’ amid continued economic resiliency (but less so now in Canada) and inflation stubbornness.”

The latest big bank rate forecasts

The following are the latest interest rate and bond yield forecasts from the Big 6 banks, with any changes from their previous forecasts in parenthesis.

Last modified: December 5, 2023