Bank of Canada prepares to raise rates after 1 year

Bank of Canada is preparing to raise its policy rate to 2.50% with a 25 basis point increase, while markets assign an 81% probability to the first tightening step brought to the table after a 1-year break. The general view at the start of the week that interest rates would remain unchanged was reversed by Governor Tiff Macklem's signal that new quarterly consumer price inflation (CPI) projections could be revised upward. Ahead of Macklem's remarks, pricing in futures markets for an October rate hike, which stood at around 30%, rapidly rose to three-quarters.

Why are economists divided on the rate hike?

In a survey conducted between October 21 and 23, 19 of 34 economists anticipate a 25 basis point rate hike this week. A majority of respondents expect another additional hike by the end of March 2027, bringing the rate to 2.75%. This picture points to a clear shift in direction compared to previous survey results, where 80% of participants thought the rate would remain flat at 2.25% through the end of 2026. Divergence persists among institutions; while HSBC analysts consider a hike likely due to rising consumer price inflation expectations, TD analysts urge caution regarding a rate hike, noting that price pressures are not broad-based and the near-term outlook remains uncertain.

How will the rate decision affect markets and oil?

The rate decision and the accompanying Monetary Policy Report will be announced on Wednesday at 9.45 a.m. US Eastern Time. As expectations for a quarter-point rate hike are largely priced in, the primary reaction of the Canadian dollar and short-term bond yields will be determined by updated CPI forecasts and the bank's forward guidance. August gross domestic product (GDP) data, scheduled for release on Friday, will serve as the first test for the path charted by the bank.

This content is for information purposes only and does not constitute investment advice.