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Bank of Canada's October Rate Decision Will Be Close, but Markets Overpricing 2027 Hikes, Capital Economics Says

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The Bank of Canada is unlikely to increase rates at its October policy meeting unless September's consumer price index unexpectedly exceeds expectations or oil prices climb sharply, according to Capital Economics in a Thursday note.

Although higher oil prices benefit Canada overall, market expectations of 125 basis points of hikes by the end of 2027 appear to be excessive, said Capital Economics.

BoC Governor Tiff Macklem has stated that the October Monetary Policy Report, to be released with the monetary decision on Oct. 29, will inform decision-making, with inflation forecasts being a crucial factor.

Although there are some indications of rising near-term inflation expectations, core inflation pressures remain subdued. As a result, Capital Economics anticipates no interest rate hike this October, but it will be a narrow call.

Even if Canada's central bank hikes, the markets' pricing suggests more tightening than justified, as a 100bps increase to reach a neutral policy range appears more appropriate given current conditions, added Capital Economics.

"Once factoring in a longer drag on demand from uncertainty around the US-Canada trading relationship, we suspect the Bank will hike by less than that," wrote Capital Economics Chief North America Economist Stephen Brown.

What else is happening in International?

International

New Zealand Job Ads Rise 0.6% in August, Up 9.7% Annually, Says Seek

New Zealand job ads rose 0.6% month on month in August and are 9.7% higher year on year, with applications per job ad rising 0.9% month on month despite the increase in available opportunities, according to a Thursday report by Seek.The report said 4% of job ads reference artificial intelligence skills, with mentions rising 4.4% month on month and over 93% year-on-year, while job ads with high-automation exposure are now 0.1% lower year on year as those with medium or low exposure continue to rise.Several regions are recording double-digit annual growth, including West Coast at about 25%, Otago at roughly 19%, and Canterbury at nearly 16%, while Manawatū, Hawke's Bay, Northland, and Taranaki were the only regions where job ads declined month-on-month, the report added.The consumer services sector also grew significantly, led by hospitality and tourism at 3.4% and retail and consumer products at 3.3%, per the report.Seek NZ country manager Rob Clark said Auckland enjoyed exceptional monthly growth in August, growing at its fastest pace in over four years, driven by increasing demand for manufacturing, transport, tourism, and hospitality workers.

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International

Saudi Central Bank Lifts Rates by 25 Basis Points

The Saudi Central Bank on Wednesday decided to hike key rates by 25 basis points to maintain monetary stability.SAMA raised the repurchase agreement, or repo rate, to 4.50% and the reverse repo rate to 4%.The move follows the US Federal Reserve's decision to lift interest rates by 25 basis points.

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International

UAE Central Bank Hikes Rates by 25 Basis Points in September

The Central Bank of the United Arab Emirates raised the base rate applicable to the overnight deposit facility by 25 basis points to 3.9%, effective Thursday.Meanwhile, the interest rate applicable to borrowing short-term liquidity was maintained at 50 basis points above the base rate for all standing credit facilities, according to a Wednesday release.The CBUAE's decision follows the US Federal Reserve's move to increase the interest rate on reserve balances.

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