Bank of Canada heads into Wednesday expected to hike for the first time since 2023

Canadians with a variable-rate mortgage or a line of credit have a date to watch. The Bank of Canada announces its next interest rate decision on Wednesday, Oct. 28, at 9:45 a.m. ET, and for the first time in three years the expected move is up, not down or sideways. Money markets are pricing in a 25-basis-point hike that would lift the overnight rate from 2.25% to 2.5%, according to Reuters, and 19 of 34 economists surveyed by the news agency from Oct. 21 to 23 expect the same thing.

If it happens, it would be the Bank's first increase since July 2023 and its first change of any kind in a year: the policy rate has sat at 2.25% since last October.

How fast expectations flipped

The shift has been abrupt. Odds of a quarter-point hike this week rose from roughly 35% to nearly 90%, according to Bloomberg data cited by The Globe and Mail. Markets now expect four quarter-point increases by the end of 2027, including this one, which would take the policy rate to 3.25%. Two-year Government of Canada bond yields, which track where traders think the Bank is headed, have climbed more than 22 basis points since the September meeting.

The case for a hike: oil

The trigger is energy. Brent crude hit a six-month high of US$116 a barrel on Friday and West Texas Intermediate traded at US$103. Annual consumer price inflation rose to 3.1% in September from 3% in August, mainly because of a 6.1% monthly jump in gasoline prices, which puts headline inflation just above the top of the Bank's 1% to 3% target range.

Governor Tiff Macklem has been signalling for weeks that the Bank is ready to act. "If oil prices stay around US$100, we expect inflation to gradually drift up from where it is today: 3 per cent," he said this month.

The case against: a weakening economy

Strip out energy and the picture looks very different. Inflation excluding energy eased to 2.2% in September from 2.4%, and the Bank's two preferred measures of underlying inflation fell to 1.9% and 1.8%, below the 2% midpoint of its target. The job market has also turned: the last two employment reports erased all of this year's job gains, and data on housing, manufacturing and wholesale trade point to much slower growth in the third quarter than in the second. The United States also plans higher tariffs in January on some Canadian autos, auto parts and steel.

That is why several prominent economists are uneasy. BMO chief economist Doug Porter told Reuters he opposes a hike because the economy is weakening, even though the Bank's messaging points to one. "In my view, the data on aggregate is not convincing to hike," said Jeremy Kronick, CEO of the C.D. Howe Institute.

What it means for you

Nothing is decided until Wednesday morning, and with core inflation below 2% and jobs falling, a hold is still possible. This is general information, not personal advice; if you face a renewal soon, compare offers and stress-test your budget at a higher rate.

• Variable-rate mortgages and lines of credit: these are tied to banks' prime rates, which normally move with the Bank of Canada. A quarter-point hike would raise payments or interest costs within weeks. - Fixed-rate mortgages and renewals: these are priced off longer-term bond yields, which have already climbed. As RBC assistant chief economist Nathan Janzen put it, "Shifting the timing by three months doesn't make that big of a difference"; the overall direction of rates matters more than the date of the first hike. - Savers: GIC and high-interest savings rates tend to follow the same yields upward, a modest silver lining.

Related

• Fixed vs. variable mortgage
• Mortgage renewal guide

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