BoC expected to raise benchmark rate for first time in three years as oil shock persists

The Bank of Canada is widely expected to raise its benchmark interest rate on Wednesday for the first time in three years, aiming to keep elevated oil prices from becoming a broader and more entrenched inflation problem. The policy rate has been held at 2.25 per cent since last October, as the council balanced the economic damage from the trade war with the United States against the global energy shock linked to the conflict in the Middle East. Brent crude reached a six-month high of US$116 on Friday, with West Texas Intermediate trading at US$103, and the Strait of Hormuz remains largely closed to oil tanker traffic.

The decision carries unusual uncertainty. Governor Tiff Macklem said on Oct. 17 at the International Monetary Fund meeting in Bangkok that if oil stays around US$100, inflation would gradually drift up from 3 per cent, and he signalled the bank would likely raise its inflation forecast in its quarterly Monetary Policy Report. Bloomberg data show markets shifted from about a 35 per cent probability of a quarter-point move to nearly 90 per cent within days, and several Bay Street forecasters changed their calls from hold to hike. Yet recent data show inflation largely contained: September CPI rose to 3.1 per cent, driven mainly by a 6.1 per cent monthly jump in gasoline, while ex-energy inflation eased to 2.2 per cent. Jeremy Kronick of the C.D. Howe Institute said the market is reacting almost entirely to Macklem's Bangkok remarks, though he also cited a sharp rise in longer-term inflation expectations in the bank's consumer survey and firms' plans to pass on costs as grounds for acting.

Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said a hike could be sound if trade talks go well and energy prices stay high, but could prove a policy mistake if oil and trade trends reverse. The timing is delicate: the housing market is in a deep slump, unemployment remains elevated, and the U.S. has threatened additional tariffs on Canadian autos. The U.S. Federal Reserve, which also meets Wednesday, is widely expected to hold rates before the Nov. 3 midterm elections.

Markets expect four quarter-point hikes by end-2027, including one this week, taking the policy rate to 3.25 per cent. Nathan Janzen of Royal Bank of Canada said the pricing reflects expectations of economic normalization, and that for fixed-rate borrowers, whether the first hike comes this week or within the next few months matters little. Longer-term Canadian bond yields, which underpin mortgage pricing, have already risen partly on U.S. rate increases and partly on expectations of future Bank of Canada hikes.