Goldman Sachs forecasts two Bank of Canada rate hikes by January
Goldman Sachs forecasts two Bank of Canada rate hikes by January
Goldman Sachs now expects the Bank of Canada to raise interest rates by 25 basis points at its October meeting this week, followed by another 25 basis point increase in January 2027, bringing rates to the center of the central bank’s 2.25-3.25% neutral rate range.
The forecast change follows hawkish commentary from Governor Macklem and the BoC’s Q3 Business Outlook and Consumer Expectation Surveys released last week. At IMF meetings last weekend, Macklem stated that "the risk that inflation broadens and becomes more persistent has gone up" and the Governing Council is "prepared to adjust monetary policy as needed."
Goldman Sachs does not view a rate hike as necessary. Core inflation in Canada runs near 2% and is expected to remain within the BoC’s 1-3% target range. Real-time growth indicators show signs of softening after new tariffs were announced in August, with threats of further 50% tariffs on cars and furniture on January 1. GDP growth is expected to fall below potential in Q4 2026 and Q1 2027 due to trade uncertainty and higher interest rates.
The BoC’s Q3 business survey showed that firms’ indicators of future sales have strengthened and investment plans remain robust. The Q4 consumer survey showed long-term inflation expectations rose by 0.5 percentage points to 3.9%.
Goldman Sachs changed its forecast last Monday. This aligns with market pricing of 21 basis points for October but is currently out of consensus, with 16 of 27 forecasters expecting a hold. Among forecasters reporting in the last week, 9 of 12 project a 25 basis point hike.
Goldman Sachs expects the October statement will cite concerns around inflation pressures from the war in Iran and rising inflation expectations as justification for a hike. The firm sees market assessment of 80-85% hike odds as reasonable.
Goldman Sachs views market pricing for 125 basis points in cumulative tightening between now and end-2027 as too hawkish relative to its baseline and risk-adjusted forecasts.