Financial market survey says Bank of Canada's next interest rate move will be a hike
Financial market participants believe the Bank of Canada will hold interest rates at their current level of 2.25 per cent before raising them to 2.5 per cent in the third quarter of 2027.
However, 63.3 per cent said the risks “were skewed to a lower path.”
Those were some of the findings of the Bank of Canada’s quarterly survey of 30 financial market participants, which includes dealers and banks, asset and pension fund managers, insurers and researchers, conducted Sept. 9 to Oct. 1.
In the previous survey, released in August, respondents said they expected the Bank of Canada to cut the rate to 2.25 per cent and then hold it there until 2026.
The central bank cut interest rates to 2.25 per cent on Oct. 29 and said rates were at the right level to support the economy without spurring inflation.
Bank of Canada governor Tiff Macklem also said monetary policy could only do so much of the heavy economic lifting given the structural changes caused by the trade war with the United States.
Last week, Prime Minister Mark Carney’s first budget laid out spending that will raise the federal deficit to $78.3 billion in the 2025-26 fiscal year as Ottawa seeks ways to protect the economy from tariffs.
The Bank of Canada’s third-quarter survey was conducted prior to the breakdown in trade talks between the U.S. and Canada when U.S. President Donald Trump took offence to an anti-tariff ad run by the Ontario government.
Market participants were also asked about the possibility of a recession and their median expectations put the chances of one over the next six months at 35 per cent, the same odds as the second-quarter survey, but up significantly from the 20 per cent chance cited in the third quarter of 2024. A recession is defined as two consecutive quarters of contracting economic growth.
The survey also revealed some deterioration in the economic outlook.
For example, the 25th percentile of responses placed the odds of a recession at 20 per cent compared with 10 per cent in the same period last year. Meanwhile, the 75th percentile assessed the probability of a recession at 35 per cent, the same as a year ago.
The median gross domestic product forecast was 0.6 per cent growth year over year in 2025, rising to 1.7 per cent by the end of next year.
Respondents also identified upside and downside risks to their forecasts. The former includes easing trade tensions, larger-than-expected fiscal stimulus and Bank of Canada rate cuts. The latter includes an increase in trade tensions, weaker consumer spending and a weaker housing market.
On the inflation front , survey participants expect the rate to hit two per cent at the end of 2025. The most recent consumer price index report pegged headline inflation at 2.4 per cent.
Looking at the Canadian dollar, the median of participants said the loonie will come in at 73 cents U.S. by year-end, compared with 74 cents U.S. at the end of last year.
The Canadian dollar is currently trading at around 71 cents U.S., up from less than 70 cents U.S. at the beginning of this year.
Recently, though, the loonie has fallen a bit more than three per cent from the high this year of 73.7 cents U.S. as a rallying American dollar and higher U.S. interest rates take their toll.
Participants expect the Canadian dollar to rally in 2026 and end the year at 75 cents U.S.
The survey also said the median of market participants expect West Texas Intermediate (WTI), the U.S. oil benchmark, to close out the year at US$62 per barrel.
WTI was trading around the US$60 level, having fallen as market watchers predict a significant glut of crude will outpace demand.
• Email: gmvsuhanic@postmedia.com