{"id":15778,"date":"2026-10-13T18:49:12","date_gmt":"2026-10-13T18:49:12","guid":{"rendered":"https:\/\/www.rbc.com\/en\/economics\/?p=15778"},"modified":"2026-10-14T14:37:59","modified_gmt":"2026-10-14T14:37:59","slug":"monthly-forecast-update-rising-bond-yields-softer-labour-data-buy-central-banks-time","status":"publish","type":"post","link":"https:\/\/www.rbc.com\/en\/economics\/financial-markets-monthly\/monthly-forecast-update-rising-bond-yields-softer-labour-data-buy-central-banks-time\/","title":{"rendered":"Rising bond yields, softer labour data buy central banks time"},"content":{"rendered":"\n
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Highlights:<\/strong><\/h4>\n\n\n\n
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Outlooks for Canada and the United States <\/strong>are little changed from September despite moderately weaker labour data.<\/p>\n<\/div>\n<\/div>\n\n\n\n

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The Federal Reserve is still expected to hike by 75 basis points in total<\/strong> (including the hike in September), but at a slower pace than previously forecast.<\/p>\n<\/div>\n<\/div>\n\n\n\n

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The Bank of Canada is still expected to hike interest rates<\/strong>, but we maintain our base case forecast for the first move in 2027 as the economy gradually improves.<\/p>\n<\/div>\n<\/div>\n\n\n\n

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Bond yields have already risen globally<\/strong>, raising Canadian household and business fixed rate borrowing costs ahead of expected BoC interest rate hikes.<\/p>\n<\/div>\n<\/div>\n\n\n\n

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Canadian interest rates <\/strong>remain low relative to global peers.<\/p>\n<\/div>\n<\/div>\n\n\n\n

Issue in focus:<\/strong><\/h4>\n\n\n\n
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Rising term yields are ending the household debt service reprieve in Canada that started in 2024, but it shouldn\u2019t derail the economy\u2019s recovery expected to persist into 2027.<\/p>\n<\/div>\n<\/div>\n\n\n\n

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

Our growth and central bank forecasts for Canada and the U.S. are little changed despite moderately weaker labour market data and higher oil prices in the past month.<\/p>\n\n\n\n

Employment grew at a slower rate in the U.S. in September, and recorded another sizable decline in Canada to push back against the odds for imminent central bank rate hikes.<\/p>\n\n\n\n

Fed officials have already signalled that further increases will be more gradual than the every-meeting pace we had incorporated into our previous outlook after a widely expected hike in September.<\/p>\n\n\n\n

Still, resilient U.S. growth and persistently high core inflation (even before meaningful passthrough from energy prices) argues that interest rates are not restrictive enough to return inflation to the Fed\u2019s 2% objective.<\/p>\n\n\n\n

We still expect two additional 25 bps interest rate hikes from the Fed, but now look for the increases to come in December and March 2027\u2014bringing the terminal range to 4.25%\u20134.50%.<\/p>\n\n\n\n

BoC is still weighing costs\/benefits of higher rates<\/h4>\n\n\n\n

Growth-inflation trade-offs are more contentious for the BoC. Our base case forecast remains that the BoC will hold through 2026 before gradually hiking rates in 2027, though significant risk still exists for earlier moves.  <\/p>\n\n\n\n

The central bank’s concern about oil prices bleeding into broader inflation means September inflation data and the Q3 Business Outlook Survey ahead of Oct. 28’s rate decision will be closely watched. But, a softer looking September labour market report is also a reminder that the economy is still shaky (even if gradually improving). <\/p>\n\n\n\n

Producer price inflation (an early signal for consumer price growth) has broadened, but history suggests those cost increases only pass through supply chains if they prove to be persistent.<\/p>\n\n\n\n

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We continue to expect the economy to gradually improve, making it easier over time to argue for raising the overnight rate from the low end of the BoC’s estimated neutral range (2.25%). Although recent tightening in financial conditions from rising bond yields are also offering the central bank room for patience.<\/p>\n\n\n\n

Globally bond yields have risen<\/h4>\n\n\n\n

Bond yields have already risen sufficiently that the exact timing of the next BoC rate move matters less than it would for a large share of households and businesses now borrowing at higher fixed rates.<\/p>\n\n\n\n

We expect the Canadian household debt service ratio (debt payments as a share of disposable income) to start increasing after easing since 2024 (see Issue in Focus below).<\/p>\n\n\n\n

Global lenders are broadly requiring an increasing amount of premium to hold longer-duration bonds against a backdrop of high energy prices, higher borrowing to support elevated government budget deficits and the AI infrastructure buildout.<\/p>\n\n\n\n

These challenges are beyond the control of any single central bank. But, the domestic economy and monetary policy still matter, and interest rates have begun to diverge more significantly by region.<\/p>\n\n\n\n

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Ten-year bond yields in France have surged almost 120 basis points over the last three months, reflecting significant fiscal concerns, while U.S. 10-year yields have risen almost 70 bps. In the meantime, the increase in Canada has been smaller at under 50 bps, driving the gap between Canada and U.S. 10-year bond yields wider.<\/p>\n\n\n\n

Overall, an improving but still softer (compared to other advanced economies) Canadian economy, subdued inflation pressures and a relatively less worrying fiscal trajectory should be supportive of lower borrowing costs in Canada ahead.<\/p>\n\n\n\n

Summary of changes in October:<\/h4>\n\n\n\n