Markets Price in 75% Chance of Bank of Canada Rate Hike on Oct. 28
Overnight index swaps indicate a 75-per-cent probability that the Bank of Canada will raise interest rates by a quarter point at its Oct. 28 meeting, following Governor Tiff Macklem's comments about revising inflation forecasts higher due to Middle East conflicts and elevated oil prices.
Financial markets are increasingly betting that the Bank of Canada will raise its benchmark interest rate at its next decision on Oct. 28, despite mixed economic data pointing to both weakening sentiment and persistent price pressures.
Overnight index swaps now suggest a 75-per-cent chance of a quarter-point hike at the upcoming meeting, up from less than 50 per cent the previous week. The shift follows comments from Bank of Canada Governor Tiff Macklem, who spoke at the International Monetary Fund meeting in Bangkok. Macklem stated he expects the central bank to revise its inflation forecast higher next week, citing the ongoing Middle East conflict and stubbornly high global oil prices as key factors influencing inflation. He warned that hiking too early could weaken the economy, while waiting too long could entrench inflation and require bigger hikes later.
September inflation data released by Statistics Canada showed headline price growth accelerated, driven by gasoline prices rising about 28 per cent year-over-year. However, excluding gas, inflation eased to 2.2 per cent from 2.4 per cent. Grocery inflation also decreased to 1.7 per cent from 2.8 per cent.
The central bank faces a difficult balancing act. Consumers’ inflation expectations remain high even as spending plans have fallen from already weak levels. Businesses reported weaker sentiment, lower export expectations, and paused investment plans after trade talks broke down between Canada and the United States. More than half of surveyed firms plan to pass cost increases on to customers.
A potential rate hike would likely push variable mortgage rates higher. Fixed-rate borrowers are shielded until renewal, but rising bond yields are already putting upward pressure on current fixed mortgage rates. Bond yields have surged this year due to worries about excessive borrowing by governments and AI hyperscalers.
A rate increase could also strengthen the Canadian dollar, making imported goods cheaper but hurting exporters. The Canadian dollar traded yesterday at its highest level in about a month, reaching 71.15 U.S. cents.
In broader market activity, global equities retreated and oil prices rose ahead of earnings reports from Netflix, GE Aerospace, and SpaceX. Wall Street futures were mixed, with the Dow pointing higher while TSX futures were in the red. In 2026, the S&P/TSX Composite Index rose by about 11 per cent, while the five-company telecom index fell by more than 16 per cent.
International markets also declined. The pan-European STOXX 600 was down 0.69 per cent, Britain’s FTSE 100 slid 0.64 per cent, Germany’s DAX dropped 0.85 per cent, and France’s CAC 40 declined 0.81 per cent. Social unrest is occurring in Europe, highlighted by statements from residents struggling with rent costs. In Asia, Japan’s Nikkei closed 1.3 per cent lower and Hong Kong’s Hang Seng fell 1.32 per cent.
In other developments, Albertans voted to remain in Canada, rejecting separatist efforts for permanent rupture. Cleveland-Cliffs' boss criticized Carney and praised Trump amid escalating conflict with Ottawa. Nova Scotia claims its winds are "world class" but lacks supporting data. Additionally, Canada’s official maple syrup reserve is near empty due to a surge in demand.