Bank of Canada expected to raise key interest rate as oil shock moves to the forefront
Mark Rendell - Globe and Mail
Bay Street is torn between head and heart heading into today’s Bank of Canada rate decision. Most analysts don’t think the central bank should raise interest rates. Nonetheless, most expect it to do just that.
As recently as two weeks ago, traders and forecasters were expecting another snoozer from the bank, which has kept its benchmark interest rate steady at 2.25 per cent since last October. Headline inflation is running high – coming in at 3.1 per cent in September ([url]https://www.theglobeandmail.com/business/economy/article-canada-inflation-rate-september-2026-statscan-report/[/url]) – but that’s mostly owing to a global oil price shock that domestic interest rates can’t control. The Canadian economy has perked up in recent quarters, but the collapse of Canada-U.S. trade talks in August followed by another round of tit-for-tat tariffs has added to uncertainty.
Expectations, however, began to shift a week-and-a-half ago, after Governor Tiff Macklem spoke to reporters from the International Monetary Fund meeting in Bangkok ([url]https://www.theglobeandmail.com/business/article-bank-of-canada-interest-rate-macklem-inflation-oil-prices-imf/[/url]). He said the persistence of the global oil price shock tied to the war in the Middle East was becoming a significant concern. The bank, he said, expected to raise its inflation forecast in its Oct. 28 Monetary Policy Report.
“The question we’re going to be asking ourselves is: Is inflation likely to come back down toward our [2-per-cent] target on its own, or are we going to have to raise interest rates to influence the path, nudge the path for inflation back toward the target?” he said.
Since these comments, benchmark oil prices have risen further, with a barrel of Brent Crude trading near a six-month high of US$115 and West Texas Intermediate trading at US$101.
Financial markets have taken Macklem’s focus on oil prices as a signal that the bank intends to raise interest rates for the first time since the summer of 2023. This conviction was bolstered by the bank’s quarterly consumer and business surveys, published last week, which showed a rise in inflation expectations. Interest rate swap markets went from pricing a roughly 35-per-cent chance of a hike, to an 80-per-cent chance of a hike, according to Bloomberg data.
Still, there’s an unusual amount of uncertainty surrounding the decision. Aggressive market pricing is mostly based on an interpretation of Macklem’s recent remarks, rather than hard economic data. The latest Consumer Price Index numbers show little evidence high oil prices are pushing up other prices and creating a widespread inflation problem. And the Canadian economy is hardly in rude health amid elevated unemployment, a soggy housing market and outstanding questions about the future of Canada-U.S. trade.
The Bank of Canada has surprised markets before. Could it do so again this morning?
Mark Rendell - Globe and Mail
Bay Street is torn between head and heart heading into today’s Bank of Canada rate decision. Most analysts don’t think the central bank should raise interest rates. Nonetheless, most expect it to do just that.
As recently as two weeks ago, traders and forecasters were expecting another snoozer from the bank, which has kept its benchmark interest rate steady at 2.25 per cent since last October. Headline inflation is running high – coming in at 3.1 per cent in September ([url]https://www.theglobeandmail.com/business/economy/article-canada-inflation-rate-september-2026-statscan-report/[/url]) – but that’s mostly owing to a global oil price shock that domestic interest rates can’t control. The Canadian economy has perked up in recent quarters, but the collapse of Canada-U.S. trade talks in August followed by another round of tit-for-tat tariffs has added to uncertainty.
Expectations, however, began to shift a week-and-a-half ago, after Governor Tiff Macklem spoke to reporters from the International Monetary Fund meeting in Bangkok ([url]https://www.theglobeandmail.com/business/article-bank-of-canada-interest-rate-macklem-inflation-oil-prices-imf/[/url]). He said the persistence of the global oil price shock tied to the war in the Middle East was becoming a significant concern. The bank, he said, expected to raise its inflation forecast in its Oct. 28 Monetary Policy Report.
“The question we’re going to be asking ourselves is: Is inflation likely to come back down toward our [2-per-cent] target on its own, or are we going to have to raise interest rates to influence the path, nudge the path for inflation back toward the target?” he said.
Since these comments, benchmark oil prices have risen further, with a barrel of Brent Crude trading near a six-month high of US$115 and West Texas Intermediate trading at US$101.
Financial markets have taken Macklem’s focus on oil prices as a signal that the bank intends to raise interest rates for the first time since the summer of 2023. This conviction was bolstered by the bank’s quarterly consumer and business surveys, published last week, which showed a rise in inflation expectations. Interest rate swap markets went from pricing a roughly 35-per-cent chance of a hike, to an 80-per-cent chance of a hike, according to Bloomberg data.
Still, there’s an unusual amount of uncertainty surrounding the decision. Aggressive market pricing is mostly based on an interpretation of Macklem’s recent remarks, rather than hard economic data. The latest Consumer Price Index numbers show little evidence high oil prices are pushing up other prices and creating a widespread inflation problem. And the Canadian economy is hardly in rude health amid elevated unemployment, a soggy housing market and outstanding questions about the future of Canada-U.S. trade.
The Bank of Canada has surprised markets before. Could it do so again this morning?
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