Bank of Canada could bring rates into restrictive territory

The Bank of Canada will have its monetary policy meeting. Market consensus is for an increase in the key rate to 3.25% next week.

Analysts look for the BoC to decide a 75-basis point interest rate hike, bringing rates into restrictive territory. They see little incentive for smaller hikes CPI running above target and the economy in excess demand.

The BoC’s messaging will be the larger source of uncertainty; we expect the Bank to emphasize that rates are now restrictive and signal that future hikes will be more modest in size.

The economic situation clearly calls for restrictive policy rates, and we see a clear path for the BoC to hike by 75bps in September. Economists expect the pace of tightening to slow in October however, which may imply some moderation in the Bank’s forward-looking language in the September communique. The USDCAD has started to run ahead of the global drivers tracked for the pair.