Royal Bank of Canada’s (RBC) Claire Fan highlights that the Q3 Canadian Business Outlook Survey underscores a difficult growth-inflation trade-off for the Bank of Canada (BoC) ahead of its next decision. While firm conditions improved into August, sentiment weakened after Canada-U.S. trade talks collapsed, with inflation expectations rising. RBC still expects no rate hikes until 2027 but notes risks skewed toward earlier moves.

BoC weighs fragile growth against inflation

"The Q3 Business Outlook Survey highlights the increasingly contentious growth-inflation trade-off confronting the Bank of Canada ahead of its upcoming policy decision."

"Odds for an October BoC rate hike rose significantly over the weekend following Governor Macklem's hawkish comments."

"But this morning's September CPI data showed core inflation measures averaging 1.9%, while the separate consumer survey suggested weaker spending intentions ahead."

"We continue to see fragile economic recovery as the biggest counterweight to heitened inflation risks, and expect caution from the BoC, especially when rising bond yields are already tightening financial conditions and raising borrowing costs for businesses and households."

"Risks to our base case forecast of no rate hikes until 2027 are tilted toward earlier moves – including potentially as early as next week’s Decision."

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