Bank of Canada Weighs Rate Hike as Headline Inflation Stays Above Target
Canada's headline inflation rose to 3.1% in September, remaining above the central bank's target range for the eighth time in nine months. With businesses and consumers expecting elevated inflation ahead, economists are debating whether the Bank of Canada will raise its benchmark rate from 2.25% in late 2025 or early 2026.
Canada’s headline inflation rose to 3.1 per cent year over year in September, missing estimates of 3.2 per cent. The reading kept inflation above the Bank of Canada’s one per cent to three per cent target range for the eighth time in nine months, even as core measures slowed to 1.9 per cent month over month and 1.8 per cent year over year.
The central bank has held its benchmark lending rate at 2.25 per cent for the past seven meetings. Governor Tiff Macklem recently stated that policymakers must decide if inflation will return to target on its own or if interest rate hikes are needed. This hawkish tone has prompted economists to debate whether a rate increase could come in late 2025 or early 2026.
Higher gasoline and energy prices fueled the increase in headline inflation, creating conflicting signals for policymakers alongside the softer core data. Business leaders share concerns about persistent price pressures. According to the Bank of Canada’s quarterly Business Outlook Survey, many expect Canada’s overall inflation rate to remain above three per cent over the next two years. Roughly half of the firms surveyed planned to pass on some or all of their cost increases related to the Iran war and tariffs. Firms are also adapting to trade tensions by modifying supply chains and investing in AI and automation, while business outlooks deteriorated after an Aug. 22 trade talks breakdown, though sentiment remains stronger than during peak trade tensions last year.
Consumers are similarly bracing for higher costs. The Canadian Survey of Consumer Expectations shows median expected inflation of 4.03 per cent over the next year and 3.88 per cent over the next two years. Respondents cited tariffs and trade tensions as the top factor affecting inflation, followed by energy prices. Current perceptions of inflation sit at 3.9 per cent, and long-term inflation expectations stand at 3.91 per cent. Consumer spending intentions have edged down due to high prices and these rising expectations.
Economists remain divided on the timing of any policy shift. Bank of Montreal suggests markets were leaning toward a hike but notes the core data gives no evidence for one. Royal Bank of Canada expects holds until next year, while KPMG Canada sees a fragile threshold with a possible hike as soon as December. Softening labor market data provides policymakers room to remain patient despite the inflation risks.
The Bank of Canada is scheduled to make its next interest rate announcement on Oct. 28, along with a new Monetary Policy Report.