Bank of Canada Expected to Raise Interest Rate as Oil Shock Fuels Inflation Concerns
The Bank of Canada is widely expected to raise its benchmark interest rate from 2.25 per cent on Oct. 28, driven by a persistent global oil price shock linked to the war in the Middle East. Governor Tiff Macklem's recent comments shifted market expectations dramatically, with swap markets now pricing an 80 per cent chance of a hike despite mixed domestic economic indicators.
The Bank of Canada is widely expected to raise its benchmark interest rate for the first time since the summer of 2023, ending a period during which it has kept the rate steady at 2.25 per cent since last October. The anticipated move on Oct. 28 follows growing concerns over a persistent global oil price shock tied to the war in the Middle East.
Headline inflation in Canada came in at 3.1 per cent in September, largely attributed to external factors rather than domestic demand. However, Governor Tiff Macklem signaled at the International Monetary Fund meeting in Bangkok that the persistence of the global oil price shock was becoming a significant concern. Macklem indicated that the central bank might need to intervene to guide inflation back toward its 2 per cent target and stated that the bank expected to raise its inflation forecast in its Oct. 28 Monetary Policy Report.
Benchmark oil prices rose following Macklem's comments, with Brent Crude trading near a six-month high of US$115 and West Texas Intermediate at US$101. This surge in energy costs contributed to a sharp shift in financial market expectations. Interest rate swap markets moved from pricing a roughly 35-per-cent chance of a rate hike to an 80-per-cent chance after the governor's remarks and the subsequent rise in oil prices.
The prospect of tighter monetary policy comes as the Canadian economy faces conflicting signals. Domestic challenges include elevated unemployment, a weak housing market, and ongoing uncertainty following the collapse of Canada-U.S. trade talks in August and the imposition of subsequent tariffs. These mixed economic indicators have increased uncertainty surrounding the central bank's decision, even as rising inflation expectations among consumers and businesses underscore the pressure on policymakers to act.