CIBC's chief economist says Canada's rate calculus differs sharply from the US — here's why
The Federal Reserve is out of time. The Bank of Canada, according to CIBC Capital Markets chief economist Avery Shenfeld, still has the luxury of waiting, and should use it.
Shenfeld made the case that while the Fed has little choice but to raise the federal funds rate this week, the Bank of Canada faces a fundamentally different set of conditions that argue for deferring any hike until at least 2027.
The Bank of Canada has held its overnight rate at 2.25% since December 2024, and most forecasts suggest bond yields will remain in the 3.0% to 3.5% range through 2026, with an upward bias.
Any shift in the Bank's posture, even a hawkish signal, could push those yields higher and lift fixed mortgage rates further at a time when clients are already navigating a punishing renewal wave.
Why the Fed has no choice
Shenfeld's argument rests on the fuel-cost shock rippling out of the Middle East conflict. With crude prices still climbing and strategic reserves drained, he argues that the Fed risks allowing headline inflation to bleed into core measures if it stays on the sidelines.
Soaring diesel prices are already working through supply chains, and core personal consumption expenditure (PCE) inflation was already running above the Fed's 2% target heading into this month's decision.
CIBC is forecasting a 25-basis-point hike from the Federal Open Market Committee (FOMC) this week, followed by a further quarter-point increase in October.
Why Canada can — and should — wait
The case for Bank of Canada patience rests on four pillars, Shenfeld writes. Canadian core inflation measures are averaging close to the 2% target.
The economy is operating with slack after the latest US tariff round, which imposed 50% duties on roughly 5% of Canadian exports as of August 22, with Ottawa's counter-tariffs taking effect September 8.
Canada's policy rate, at 2.25%, is already well below that of the United States, and interest-sensitive demand for capital goods and consumer durables has not gained meaningful traction.
Most critically, Shenfeld warns the Bank risks hiking directly into a trade-darkened outlook. A threatened 50% tariff on Canadian autos and parts come January 2027 has yet to be resolved, and the Canada-United States-Mexico Agreement (CUSMA) faces its own vulnerabilities if Washington continues imposing tariffs that contradict treaty obligations.
Shenfeld described Wednesday's September 2 hold as unsurprising "amidst the fog of a trade war."
The Bank of Canada will sound hawkish but act cautiously. Shenfeld expects it to defer actual rate hikes until after the new year — when, if a trade deal is back within reach, governing council will reassess.
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