Bank of Canada Expected to Raise Interest Rates on October 28 Amid Inflation Concerns
Markets and economists anticipate the Bank of Canada will raise its policy rate from 2.25 per cent to 2.5 per cent on October 28, driven by rising headline inflation and hawkish signals from Governor Tiff Macklem, despite a stalling economy.
The Bank of Canada is widely expected to increase its key overnight lending rate on Wednesday, October 28, ending a pause of more than 11 months during which the policy rate has remained steady at 2.25 per cent. Markets are currently pricing in an 80 per cent probability that the central bank will raise rates for the first time since 2023, with most major economic forecasting firms now predicting a quarter-point hike to 2.5 per cent.
The anticipated move comes as Canadian inflation ticked up to 3.1 per cent last month, even while core measures remained subdued. The Canadian economy is simultaneously facing weak growth, with gross domestic product stalling at zero per cent in July and expected to grow by only 0.1 per cent in August.
A shift in expectations among forecasters followed recent communications from the central bank. Bank of Canada Governor Tiff Macklem struck a hawkish tone during recent International Monetary Fund meetings, signaling that the institution is prepared to adjust rates to anchor inflation expectations despite higher-than-expected energy prices. Desjardins Group changed its forecast from a hold to expecting a rate hike to 2.5 per cent after reviewing Business Outlook Survey data showing that firms plan to pass on cost increases related to tariffs and the Iran war.
RBC Economics analysts Frances Donald and Nathan Janzen noted that the Bank of Canada views current inflation through the lens of the 2022-2023 pandemic surge, leading to a willingness to act pre-emptively. RBC Economics projects a rate hike to 2.5 per cent on Wednesday and notes it likely will not be the last increase, though the firm acknowledges a hold remains possible due to economic slack. CIBC Capital Markets forecasts potential hikes to 2.5 per cent in October and 2.75 per cent in December or January, citing Governor Macklem's hawkish stance as surprising relative to prior market assumptions.
Not all observers agree that tightening monetary policy is warranted right now. Some economists, including Andrew Grantham, argue it may be too early to raise rates given the weak economy and a lack of recovery from sluggish performance earlier in 2025. Sources also differ on whether the primary driver for the expected hike is the current inflation data, which shows stable core measures, or the hawkish communication from the Bank of Canada combined with forward-looking business surveys.