'Hawkish' Bank of Canada has some economists pulling forward calls for rate hikes

The Bank of Canada held its benchmark lending rate at 2.25 per cent on Wednesday, but economists are split on the outlook for this year and 2027 due to the threat of inflation spreading and the effect of tariffs on growth.

Here’s a look at what some of them are forecasting.

“Confronted with another spike in oil prices and a fresh wave of U.S. protectionism, Canadian central bankers remained firmly on the sidelines, highlighting their difficult balancing act,” Royce Mendes, managing director and head of macro strategy at Desjardins Group, said in a note.

Despite the turbulence, Canada’s economy grew 3.3 per cent on an annualized basis in the second quarter, and he said the central bank has indicated it doesn’t think the latest round of United States tariffs poses a threat to gross domestic product, especially since Ottawa announced a series of support programs to buffer some of the effects.

Mendes said the Bank of Canada appeared to suggest the greater threat lies with inflation from higher fuel prices that could spread to other parts of the economy.

All this adds up to a “more hawkish tone” from policymakers, he said.

Desjardins expects the Bank of Canada to leave rates on hold for the rest of the year and then hike them by 50 basis points to 2.75 per cent in the first half of 2027.

That’s an accelerated timetable. Initially, Desjardins called for one hike in the second quarter and another in the third.

Watch out for December: Capital Economics

“The Bank of Canada delivered a more hawkish message,” Stephen Brown, chief North America economist at Capital Economics Ltd., said in a note, citing the central bank’s view that inflation risks have increased.

As evidence that policymakers could be contemplating a move on rates, he noted that they replaced a line in the statement that rates “remain appropriate” with one that said the Bank of Canada is ready to adjust rates as needed.

Bank of Canada governor Tiff Macklem indicated he isn’t too worried about the effect of tariffs on Canada’s growth, though Brown added that policymakers acknowledged the escalating trade dispute between the United States and Canada is adding uncertainty at a time when labour demand is still weak.

With no end in sight to the U.S.-Iran conflict and elevated fuel prices, Capital has pulled forward its call for a rate hike to December from June next year.

‘Bones’ for the doves: Rosenberg Research

“For the doves like us, there were plenty of bones that were dished out,” David Rosenberg, president of Rosenberg Research & Associates Inc., said in a note on the latest rate decision.

“Bones” thrown included the Bank of Canada’s assessment that inflation has yet to spread beyond the cost of fuel, strong second-quarter growth based on “temporary factors” and new tariff risks upending the sustainability of the country’s economic recovery.