SKN | UBS Projects a Further Bank of Canada Rate Tightening Cycle Through 2028

Key Takeaways:

• UBS expects the Bank of Canada to increase its policy rate from 2.50% to 3.00% by January 2027.
• The bank projects a further rise to 3.50% by the end of 2028, representing a cumulative 100-basis-point increase from the current level.
• UBS anticipates two phases: near-term tightening followed by a period of stability, before renewed increases as economic demand strengthens.
• The forecast reflects persistent inflation risks, higher energy costs and the possibility that Canada’s economy will operate closer to capacity.

UBS expects Canada’s interest-rate environment to become progressively tighter over the next two years, projecting that the Bank of Canada will raise its policy rate from 2.50% to 3.50% by the end of 2028. In its latest economic assessment, the Swiss banking group anticipates an initial move to 3.00% by January 2027, followed by a pause before further increases later in the forecast period.

The projection represents a more sustained tightening outlook than a single adjustment in response to higher inflation. For UBS, the central issue is whether persistent price pressures and improving economic demand will eventually require monetary policy to become less accommodative.

UBS Identifies Two Distinct Phases of Monetary Tightening

UBS’s forecast outlines a gradual path rather than a continuous sequence of rate increases. The first phase involves moving the policy rate to 3.00% by January 2027. The bank then expects a period of relative stability as inflation trends develop and the labour market adjusts.

The second phase involves another increase in borrowing costs, taking the policy rate to 3.50% by the end of 2028. UBS links this later adjustment to the possibility of stronger domestic demand and an economy operating closer to its productive capacity. Under those conditions, additional monetary restraint could become necessary to prevent demand from generating renewed inflationary pressure.

This two-stage assessment is important because it distinguishes UBS’s near-term inflation response from its longer-term view of Canada’s economic capacity. The bank is not simply projecting higher rates because of current energy prices; it is also considering how economic activity could evolve once available capacity becomes more constrained.

Inflation and Economic Capacity Shape UBS’s Outlook

The forecast follows the Bank of Canada’s October 28 decision to raise its policy rate by 25 basis points to 2.50%, its first increase since July 2023. The central bank cited persistent energy-price pressures and the risk that higher production and transportation costs could spread into broader consumer prices.

UBS’s assessment reflects these inflation concerns while looking beyond the immediate energy shock. Its longer-term projection assumes that economic resilience and stronger demand could gradually reduce available capacity, creating conditions for further tightening. However, the timing remains dependent on incoming inflation, employment and economic activity data. Trade disruptions also represent a potential complication, as they could weaken growth while increasing import costs.

Why UBS’s Forecast Matters for International Capital Planning

UBS’s projection has implications for investors and internationally exposed borrowers with Canadian dollar liabilities. A higher policy-rate trajectory could keep financing costs elevated and influence expectations for Canadian bond yields, mortgage pricing and currency markets. However, the forecast remains UBS’s research assessment, not a commitment by the Bank of Canada to follow that path.

The central bank has indicated that further increases may be necessary but will proceed carefully, with decisions made according to incoming evidence. UBS’s 3.50% projection therefore remains conditional rather than a guaranteed outcome. Investors should monitor inflation persistence, labour-market conditions and the pace of domestic demand as the outlook develops. For a confidential discussion regarding interest-rate exposure, currency positioning and your cross-border wealth structure, contact our senior advisory team.