In today's faster-paced, inflation-sensitive global economy, being the last central bank to calibrate rates to surging prices is not a good look. On Wednesday, Tiff Macklem hinted that "small" changes to policy might be ahead. Despite his not saying in which direction, the market thinks it knows.
Sometimes it pays to glance abroad and see what countries resembling Canada are saying and doing about inflation. Canada does not set rates in a vacuum. Bond yields, the puppet strings behind fixed mortgage rates, typically move in global sync, so inflation trends overseas can provide clues for Canadian rate forecasting.
European and Oceanian central banks often tip their hand before the Bank of Canada plays its own, and the central bank watches every one of them like a poker player looking for tells. In other words, how comparable countries react to incoming inflation information gives clues about how Governor Tiff Macklem's team might respond to similar data.
Apart from the United States, I like to keep tabs on three countries in particular: Australia, Norway and New Zealand. They are small, open, commodity-linked economies, structurally similar to Canada in important ways.
Australia (RBA): tightening
The RBA hiked 25 basis points to 4.35 per cent on May 5. It was its third consecutive hike this year and apparently not the last, according to overnight index swap pricing from LSEG. The Aussies blamed Middle East fuel inflation and domestic capacity pressures. The Board signalled it can pause and assess, but flagged upside risks. Markets price the cash rate reaching 4.7 per cent by year-end.
Norway (Norges Bank): tightening
Norges Bank unexpectedly hiked 25 basis points to 4.25 per cent yesterday, its first raise since 2023. The Committee cited stubborn above-target inflation worsened by Middle East energy disruption and risks of unanchored expectations, one of the Bank of Canada's biggest fears. Market-implied pricing points to a rate above 4.5 per cent by year-end 2026.
New Zealand (RBNZ): on hold, hawkish bias
The RBNZ held the OCR at 2.25 per cent on April 8 after cutting through 2025. The Committee debated the timing of hikes, not cuts, citing a projected 4.2 per cent inflation spike from the oil shock. Kiwi markets are pricing a 25 basis point hike this summer.
Canada's wake-up call
CANNZ economies (Canada, Australia, Norway, New Zealand) have fairly correlated policy rates, meaning they move together most of the time, especially during global shocks. It is important to note that these central banks acknowledge that employment will likely weaken and inflation should fall next year, yet they are hiking rates anyhow, or about to. That is not the kind of thing Macklem overlooks.
Granted, Canada does not import inflation from CANNZ peers the way it does from the United States. America's gravitational pull on our economy outweighs what other resource-rich advanced economies are doing. And that cannot be overstated, since Canada still faces downside rate risk from pending U.S. trade policy. Mind you, expected Republican losses in November's U.S. mid-term elections could curb President Donald Trump's control next year, theoretically making him less likely to continue treating Canada poorly.
