Policy Rate: Forecast Revisions in Canada and Tight Lips at the Fed

Canada is moving from a disinflation scenario toward reflation, while the Fed is waiting for more data but is likely to continue tightening.

• The Bank of Canada raised its policy rate by 25 basis points to 2.5%, its first hike in 39 months, and now expects inflation to reach 3.1% in 2027 versus 2.1% in April and 2.0% in July.
• Addenda argues that domestic demand is stronger than the BoC assumes: consumption growth has stayed above 2.0%, potential growth is below 1.5% in 2026 and about 1.5% in 2027, and services inflation excluding shelter is 3.7%.
• Services are the main inflation risk, with 16 of 30 components, or 53%, above 3%; the PCE services wage bill is rising by $40 billion year over year, four times its pre-COVID pace.
• Addenda's simulation attributes the persistence of total CPI primarily to core reflation rather than energy, and its analysis of the BoC's negative real policy rate supports a forecast of 75 basis points of additional tightening.
• The Fed held its target range at 3.75%-4%, with Lisa Cook and Beth Hammack dissenting in favour of a 25-basis-point hike; Addenda's diffusion indexes show recent improvement, but its base case still includes 50 basis points of remaining hikes.

Takeaway: Investors should expect further policy tightening in both countries, although the Fed may wait for additional inflation data and December taskforce findings before changing course.