Rabobank expects the Bank of Canada (BoC) to hold its overnight rate at 2.25% at the 2 September meeting and to keep it unchanged through 2027, even as markets are pricing about 17bp of tightening by year-end. The bank points to stronger Q2 GDP growth, driven by exports, while flagging escalating US\u2013Canada trade tensions and elevated headline CPI inflation linked to energy and trade-related risks.<\/p>\n
On the growth outlook, it says tariffs at roughly current levels could reduce Canadian GDP by 0.3\u20130.4ppt through the end of next year. The note also refers to subdued underlying trends tied to a productivity crisis, alongside geopolitical strains including higher reciprocal US and Canadian tariffs and the Strait of Hormuz remaining closed to traffic, which it frames as consistent with policy already at a terminal rate of 2.25%. <\/p>\n
We see a prime opportunity for derivative traders to exploit the gap between market expectations and our forecast ahead of the September 2 interest rate decision. While the market is currently pricing in about 17 basis points of tightening by the end of the year, we expect the Bank of Canada to hold its overnight rate steady at 2.25%. Traders should consider receiving fixed on Canadian overnight index swaps (OIS) or buying short-term CORRA futures to profit as these hawkish expectations melt away.<\/p>\n
Recent data shows that escalating trade tensions could drag Canadian GDP down by 0.3% to 0.4% through next year, especially as new bilateral tariffs take effect. Although Q2 export-led growth looked resilient, these mounting protectionist headwinds will severely limit the central bank’s capacity to hike rates further. Historically, during similar trade disputes, such as the tariff skirmishes of 2018 which slowed Canadian export growth to under 1%, the central bank was forced to pause its tightening cycle. <\/p>\n
We acknowledge that headline inflation remains elevated, fueled by energy volatility and supply chain pressures like the closure of the Strait of Hormuz. However, Canada’s structural productivity crisis means the underlying economy is far too fragile to absorb higher borrowing costs. Since monetary policy is already at its terminal rate of 2.25%, betting on further rate hikes is a miscalculation that we believe traders should actively fade in the coming weeks.<\/p>\n\n\n\n