BoC seen nearing first rate hike in 3 years

The Bank of Canada is under growing pressure to raise interest rates next week, in what would be its first rate hike in more than three years. The policy rate has been held at 2.25 per cent since a quarter‑point cut in October 2025 and has not been raised since July 2023. Traders in the overnight swap market are assigning an 87 per cent probability to a 25‑basis‑point increase at the October 28 decision. Government of Canada bond yields currently sit above the Bank’s rate, reflecting expectations of higher interest rates and ongoing inflationary pressures.

While the consensus in a recent Bloomberg survey still points to no change next week, several major institutions have shifted their calls from hold to hike. Bank of Montreal, RBC Dominion Securities and Desjardins Group now expect the Bank of Canada to raise rates on October 28. Economists such as Derek Holt at Scotiabank and David Doyle at Macquarie Group also argue there is enough evidence to justify higher borrowing costs.

Governor Tiff Macklem has recently signalled greater concern about the inflation outlook. Speaking at International Monetary Fund meetings in Bangkok, he said the outlook for inflation would be “quite a bit higher” than in the Bank’s July forecast, which had projected inflation cooling to around 2.5 per cent in the second half of this year. The Bank’s formal target is two per cent inflation within a one to three per cent range.

Macklem has stressed that elevated oil and gas prices are a risk to inflation, particularly as conflict in the Middle East has roiled global energy markets and shows “no resolution in sight.” He has warned that if energy prices go higher and stay high for longer, there could be a need to increase the policy rate to return inflation to target. Recent Bank of Canada surveys show five‑year inflation expectations at a four‑year high, a development that has helped push many Bay Street forecasters toward expecting rate hikes.

Several economists now explicitly forecast a 25‑basis‑point hike at next week’s meeting. Derek Holt has argued that the trend in inflation data provides a warning that the Bank needs to begin tightening and has called for a 25‑basis‑point move. Randall Bartlett at Desjardins expects a 0.25 per cent hike next week and another 0.25 per cent increase in January, describing the recent inflation signals as having “flipped the script” toward a tightening stance.

Some analysts anticipate that next week’s potential move could mark the start of a broader cycle. David Doyle of Macquarie Group continues to see a steady rate‑hike cycle ahead. Leah Zlatkin, a mortgage broker, has suggested that if there is a hike, it is likely to be part of an ongoing interest‑rate cycle rather than a one‑off adjustment. One forecast points to a cumulative 125‑basis‑point increase in the policy rate by the end of 2027.

The push toward higher rates comes against a mixed economic backdrop. Headline inflation has hovered around three per cent for three consecutive months, raising concerns at the central bank that prolonged overshooting could lead to more generalized price pressures. At the same time, there has been little evidence so far of broad spillover from higher energy prices into consumer prices, and recent stronger inflation readings are being treated cautiously by some observers.

On the growth side, real gross domestic product is trending at about one per cent, described as weak even if not recessionary, and the economy has lost more than 40,000 jobs this year. Wage growth has decelerated to 2.3 per cent year over year from 3.3 per cent a year earlier, pointing to slack in the labour market. The housing market is under strain, with per‑capita home sales back to 1990s levels and a contraction in residential real estate, and analysts say rising rates could plausibly trigger further gradual declines in home prices over the coming months.

Higher bond yields are already tightening financial conditions even without a change in the policy rate. This has led some commentators to describe the outcome of next week’s decision as a close call, as policymakers weigh the need to contain inflation expectations against evidence of fragile growth and housing‑sector stress. The debate around the meeting centers on whether acting now will help prevent inflation from becoming entrenched or risk exacerbating existing economic weakness.