Goldman Sachs Projects Two Bank of Canada Rate Hikes by January

Goldman Sachs has revised its forecast for the Bank of Canada (BoC), now anticipating two 25 basis point interest rate hikes by early next year. The firm projects an initial quarter-point increase at the central bank's October meeting this week, followed by a second hike in January 2027.

A Shift in Outlook

The forecast change, announced last Monday, follows recent hawkish commentary from BoC Governor Tiff Macklem and concerning data from the central bank's latest surveys. At IMF meetings, Macklem noted that "the risk that inflation broadens and becomes more persistent has gone up" and that the Governing Council is "prepared to adjust monetary policy as needed."

This sentiment was reinforced by the BoC’s third-quarter surveys, which Goldman Sachs cited as a key driver for its updated call. The reports showed resilient business investment plans and, critically, a 0.5 percentage point increase in long-term consumer inflation expectations to 3.9%.

Economic Crosscurrents

Despite forecasting the rate hikes, Goldman Sachs analysts noted they do not view them as strictly necessary. They pointed out that Canada's core inflation is running near 2% and is expected to stay within the BoC's 1-3% target range. The firm also highlighted softening real-time growth indicators following new tariffs announced in August.

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Analysts expect Canadian GDP growth to fall below potential in the fourth quarter of 2026 and the first quarter of 2027. This anticipated slowdown is attributed to trade uncertainty, including the threat of further tariffs, and the impact of higher interest rates.

Market Pricing vs. Consensus

Goldman's forecast for a hike this week aligns with current market pricing, which implies an 80-85% probability of a 25 basis point move. However, the call is out of step with a broader consensus of 27 forecasters, where 16 still expect the BoC to hold rates steady.

Among a more recent sample of forecasters reporting in the last week, however, 9 out of 12 project a hike, suggesting a recent shift in expectations. Looking further ahead, Goldman Sachs views current market pricing for 125 basis points in cumulative tightening by the end of 2027 as "too hawkish" compared to its own baseline forecast.