{"id":14616,"date":"2026-09-11T18:34:13","date_gmt":"2026-09-11T18:34:13","guid":{"rendered":"https:\/\/www.rbc.com\/en\/economics\/?p=14616"},"modified":"2026-09-11T20:36:52","modified_gmt":"2026-09-11T20:36:52","slug":"boc-and-fed-to-hike-from-different-starting-points","status":"publish","type":"post","link":"https:\/\/www.rbc.com\/en\/economics\/financial-markets-monthly\/boc-and-fed-to-hike-from-different-starting-points\/","title":{"rendered":"BoC and Fed to hike from different starting points"},"content":{"rendered":"\n
\n
\n

Highlights:<\/strong><\/h4>\n\n\n\n
\n
\n
\"\"<\/figure>\n<\/div>\n\n\n\n
\n

Resurging oil prices are adding to inflation worries<\/strong> that may prompt global central banks to (in some cases, further) raise interest rates in the near-term. We revised our headline inflation forecasts higher for Canada and the United States, but for now expect gradual and limited passthrough to core inflation.<\/p>\n<\/div>\n<\/div>\n\n\n\n

\n
\n
\"\"<\/figure>\n<\/div>\n\n\n\n
\n

We continue to expect the Bank of Canada will hold interest rates before hiking gradually in 2027 on a stronger economy.<\/strong> Risks are tilting towards earlier hikes if the economy and labour market continue to recover amid the trade shock, but oil prices don\u2019t normalize as assumed.<\/p>\n<\/div>\n<\/div>\n\n\n\n

\n
\n
\"\"<\/figure>\n<\/div>\n\n\n\n
\n

The Federal Reserve is now expected to hike.<\/strong> Another upside inflation surprise in August was likely enough to tip a majority of the FOMC in favour of rate hikes in September. We expect the Fed will follow up with two additional hikes this year, effectively unwinding 75 basis points of \u201cinsurance\u201d cuts in 2025.<\/p>\n<\/div>\n<\/div>\n\n\n\n

\n
\n
\"\"<\/figure>\n<\/div>\n\n\n\n
\n

Escalation of the trade war between Canada and the U.S.<\/strong> doesn\u2019t change our cautiously optimistic outlook for Canada.<\/strong> New measures<\/a> have not significantly expanded the tariff coverage of trade relative to existing measures, though targeted sectors remain vulnerable.<\/p>\n<\/div>\n<\/div>\n\n\n\n

Issue in focus:<\/strong><\/h4>\n\n\n\n
\n
\n
\"\"<\/figure>\n<\/div>\n\n\n\n
\n

We take a closer look at broader energy inflation passthrough dynamics in Canada, and identify key industries and consumption categories that are most oil intensive as prices surge again.<\/p>\n\n\n\n


We reiterate the scope of oil intensity is generally narrow, with transportation being by far the most sensitive industry and consumption group outside of direct fuel consumption. There\u2019s limited evidence of a passthrough to-date, but risks are heightened as oil prices climb.<\/p>\n<\/div>\n<\/div>\n\n\n\n

\n\n\n\n

Forecast changes:<\/h3>\n\n\n\n

In Canada, headlines have centered on the escalation in the Canada-U.S. trade conflict. As we\u2019ve covered before, we continue to expect measures will have contained impact on the macroeconomy.<\/p>\n\n\n\n

For targeted sectors, production and exports will fall from reduced U.S. demand, although federal and provincial government support programs should help to partially lessen the impact.<\/p>\n\n\n\n

Meanwhile, both Canada and the U.S. are being hit with two additional shocks in the past month:<\/p>\n\n\n\n

1. A material tightening in financial conditions as government bond yields rise across the world, raising costs for households and businesses to borrow even without central bank action. <\/p>\n\n\n\n

2. A resurgence in oil prices that\u2019s raising the likelihood of a broader inflationary shock.<\/p>\n\n\n\n

The two economies are entering these shocks from different staring points.<\/p>\n\n\n\n

Canada\u2019s starting place is one of some remaining slack in the economy, and core inflation that has, at least until now, remained well anchored around 2%. Consistent with that backdrop, the BoC\u2019s policy rate has been sitting at the low end of the estimated neutral range\u2014in other words\u2014borderline stimulative.<\/p>\n\n\n\n

The U.S., however, is starting from a completely different backdrop. Inflation has run above 2% for more than five years, growth in the economy has been exceptionally strong and the labour market is tight.<\/p>\n\n\n\n

Contrasting starting places simply mean the Fed has a lot less flexibility than the BoC to be waiting for elevated oil prices to turn into bigger inflation problems.<\/p>\n\n\n\n

It\u2019s time for the Fed to hike rates<\/strong><\/strong><\/strong><\/h4>\n\n\n\n

Evolving U.S. inflation data, historically low unemployment rates and risks that oil prices could stay high from the ongoing Middle East conflict are sufficient for us to expect a rate hike from the Fed in September. The question then becomes how many more hikes will follow, and how effective they will be.<\/p>\n\n\n\n

We expect there will be three rate hikes in total from the Fed this year including September, that could largely be viewed as a reversal of the 75 bps of rate cuts at the end of 2025\u2014billed at the time as insurance cuts against some light weakening in the labour market.<\/p>\n\n\n\n

To an extent, sticky core inflation is also being driven by supply-side factors the Fed can’t control, including the AI buildout that spurred high levels of business investment (and borrowing) but has shown signs of peaking. A wide government budget deficit will also keep a floor under economy-wide demand.<\/p>\n\n\n\n

After the tightening assumed this round, we expect the Fed will go back to \u201chold and observe\u201d, especially with the added layer of high oil prices in play that\u2019s exacerbating inflation concerns.<\/p>\n\n\n\n

BoC still expected to hike later in 2027<\/strong><\/strong><\/h4>\n\n\n\n

In Canada, higher oil prices mean risks to our call for the BoC to start hiking in 2027 are now tilting towards earlier. The key deciding factor is the degree of the bleed-through from energy into broader inflation, which we expect will be gradual and limited (see Issue in focus below).<\/p>\n\n\n\n

And there are other risks to inflation from elevated oil prices. Inflation expectations can rise (we\u2019ll learn more in the Business Outlook Survey on Oct. 18), and additional oil revenue in the economy can also add to growth in Canada (albeit very unevenly) to further add to underlying inflation.<\/p>\n\n\n\n

But, the economy\u2019s recovery is also fragile, especially in an environment where U.S. tariffs may still meaningfully escalate. For now, we continue to view a significant bleed through of oil to inflation, and downside economic impact from additional tariffs as risks to our base case forecast rather than the forecast itself, and expect the BoC will hold through 2026 while watching risks on both sides.<\/p>\n\n\n\n

Summary of forecast changes in September:<\/h4>\n\n\n\n