Bank of Canada Expected to Raise Interest Rate on Oct. 28 as Oil Prices Surge
The Bank of Canada is widely expected to raise its benchmark interest rate for the first time in three years on Oct. 28, driven by elevated oil prices. Governor Tiff Macklem's hawkish remarks at an IMF meeting in Bangkok pushed market odds of a hike from roughly 35 per cent to nearly 90 per cent, even as underlying inflation measures have eased.
The Bank of Canada is widely expected to raise its benchmark interest rate on Wednesday, Oct. 28, marking the first increase in three years. The bank’s governing council has held the policy rate steady at 2.25 per cent since last October.
Expectations for a rate hike intensified after Governor Tiff Macklem delivered hawkish remarks at an International Monetary Fund meeting in Bangkok. Following his comments, financial markets shifted from pricing in a roughly 35-per-cent chance of a quarter-point increase to nearly 90 per cent. Macklem stated that if oil prices remain around US$100, inflation is expected to gradually drift up from 3 per cent.
Global energy costs have surged amid the war in the Middle East and the closure of the Strait of Hormuz. A barrel of Brent Crude recently hit a six-month high of US$116, while West Texas Intermediate traded at US$103. These elevated oil prices are driving expectations of entrenched inflation, and longer-term Canadian bond yields have climbed, affecting mortgage rates. Consumer and business surveys also show rising long-term inflation expectations.
Annual consumer price index inflation reached 3.1 per cent in September, up from 3 per cent the previous month, largely driven by a 6.1-per-cent monthly jump in gasoline prices. However, excluding energy, the rate of inflation eased to 2.2 per cent from 2.4 per cent the month before. The Bank of Canada’s two preferred measures of underlying inflation fell to 1.9 per cent and 1.8 per cent.
This divergence between headline and core inflation has created uncertainty about whether a rate hike is necessary. Some economists argue the aggregate data does not justify an increase, while others point to de-anchoring inflation expectations as a reason to act. There are also concerns that higher borrowing costs could further harm the Canadian housing market, which is in a deep slump, and weigh on an economy where unemployment remains elevated. Additionally, the United States has threatened additional tariffs on the Canadian auto sector.
Markets currently expect the bank to deliver four quarter-point rate hikes by the end of 2027, taking the policy rate to 3.25 per cent. South of the border, the U.S. Federal Reserve raised interest rates last month partly in response to high energy prices and is expected to hold its policy rate steady ahead of the Nov. 3 U.S. midterm elections.