Bank of Canada: Energy Risks Complicate October Decision - RBC

RBC analysts, led by Rachel Battaglia, have assessed the outlook for the Bank of Canada's (BoC) October policy meeting, suggesting that multiple interwoven factors make the direction of this decision difficult to determine.

**Population Data Revisions: Mechanically Easing Rate Hike Pressure**

Battaglia noted that upward revisions to retrospective population growth data imply a correspondingly stronger estimate of Canada's potential output, which at a mechanical level reduces the need for the central bank to hike rates further. However, she also emphasized that key indicators of economic slack, such as the unemployment rate and business surveys, have not changed as a result of these population data revisions, which partially offsets the aforementioned positive effect.

**Energy Price Risks Emerge as New Variable**

Battaglia specifically highlighted that policymakers' attention to energy price risks is continuously rising, a factor that adds further uncertainty to an already complex policy path. Meanwhile, according to Standard Chartered Bank economist Dan Pan's assessment, the Bank of Canada is expected to hold its policy rate at 2.25% and defer a 25-basis-point cut to December, citing the rebound in second-quarter economic growth as reducing the need for immediate policy easing.

**Market Pricing and Trade Risks**

According to market reports, financial markets had previously priced in nearly 75 basis points of cumulative rate hikes by the Bank of Canada over the next twelve months. However, fixed income strategists believe that, given the current trade friction situation, this path is overly aggressive and has room for a dovish repricing. BoC officials have also previously signaled that if the U.S. introduces significant new trade barriers, the central bank could be forced to cut rates further to protect domestic economic growth. Taken together, RBC's assessment indicates that the October meeting outcome remains highly dependent on the latest developments in energy market trends and the trade situation.