With businesses facing higher costs ahead of the Bank of Canada's Oct. 28 decision, Royal Bank of Canada (RBC) sees a chance of an earlier rate increase while keeping its base case unchanged through 2026.
Business sentiment improved across the third quarter. The proportion of firms that had accounted for a Canadian recession in their plans for the next year fell to 6% from 17%, the lowest result since the Bank introduced the question in 2023. The Bank collected responses from Aug. 6 to Sept. 2; roughly three-quarters came before the Aug. 21 breakdown in Canada-U.S. trade talks and Canada's announcement of new counter-tariffs.
Later interviews captured weaker sentiment and lower expectations for export sales among firms. Inflation expectations also rose alongside tariffs and higher energy prices, the Bank said, while investment plans faced renewed pressure.
About half of firms expected to raise prices to offset some costs, a larger share than in the previous quarter. If carried through, those increases would put some of the burden on customers and could help firms restore margins eroded by earlier expenses. The Bank cited tariffs, fuel costs and somewhat improved demand among factors behind the plans. RBC reported that firms' September survey expectations were 3.7% one year ahead and 3.1% two years ahead.
Consumers grew more cautious about spending, even though their plans had already been subdued, the Bank's separate consumer survey found. High prices and economic uncertainty weighed on those plans. Statistics Canada reported that annual inflation rose to 3.1% in September from 3.0% in August, as gasoline prices climbed 27.8%. The Bank's preferred CPI-trim and CPI-median measures eased by 0.1 percentage point each, to 1.8% and 1.9%.
Claire Fan, a senior economist at RBC, said the bank's base case remains no rate increases until 2027, with risks “tilted toward earlier moves.” Fan said higher bond yields had made financing more expensive for households and companies. The Bank held its overnight rate at 2.25% on Sept. 2. It is due to announce its next rate decision and publish a Monetary Policy Report at 9:45 a.m. ET on Wednesday, Oct. 28.
