Market Expectations Shift to Coin Flip for Bank of Canada’s October Rate Decision
Following the U.S. Federal Reserve's recent rate hike, market odds for the Bank of Canada's next decision have narrowed to a near coin flip between holding rates steady or raising them, driven by high energy prices linked to the war in Iran.
The U.S. Federal Reserve delivered its first rate hike in more than three years on Wednesday to combat inflationary pressures. In response, market expectations for the Bank of Canada's next decision on Oct. 28 have shifted significantly. While the central bank has maintained its policy rate unchanged at 2.25 per cent for nearly a year as of late September 2026, the landscape for future monetary policy is becoming less predictable.
Before the Bank of Canada's Sept. 2 decision, LSEG Data & Analytics pegged odds of a rate hold at 94 per cent. However, following the Fed's move, market odds for the upcoming Oct. 28 meeting fluctuated sharply but stood narrowly in favour of a rate hike as of Thursday afternoon.
Claire Fan, senior economist at RBC, attributes the shift in odds toward an October hike primarily to persistently high global energy prices tied to the war in Iran. The Bank of Canada's governing council expressed similar concern in its Sept. 2 deliberation summary, noting that oil prices were staying higher for longer and posing a risk to inflation.
Despite these inflationary pressures, some economists expect the central bank to remain cautious. Rising bond yields, driven by expectations of rate hikes and concerns over U.S. sovereign debt, make borrowing more expensive for Canadians and may reduce pressure on the central bank to raise rates independently. Additionally, potential re-escalating tariff disputes with the U.S. threaten economic growth, while deteriorating consumer and business confidence is expected in upcoming surveys.
Economists Claire Fan (RBC) and Randall Bartlett (Desjardins) both expect the Bank of Canada to remain on hold for the rest of 2026 and deliver a rate hike in the first quarter of 2027. Meanwhile, Stephen Brown, chief North America economist at Capital Economics, expects the Bank of Canada to upgrade its inflation forecasts due to elevated oil price projections when it publishes its quarterly outlook at the end of next month.