The Bank of Canada’s bold call to raise interest rates again so soon after its well-telegraphed July hike caught some investors completely by surprise, resulting in a sharp increase in rate expectations over the next 12 months. As things stand, the market implied probabilities suggest that there is a near 40% chance of another interest rate hike to 1.25%, from 1.00%, at the October policy rate meeting. Our view is that, at this stage, an October rate hike is slightly more likely than not. The bigger question is where will rates be in 12 months’ time? In stark contrast to the consensus, our view is that a worsening housing downturn will force the Bank of Canada to loosen policy again next year.
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