Bank of Canada likely to raise rates as oil shock intensifies, while Fed expected to hold

The Bank of Canada is expected to increase its benchmark interest rate from 2.25 % to 2.50 % in today’s policy announcement, marking the first hike since October 2023. The move follows Governor Tiff Macklem’s recent comments at an International Monetary Fund meeting, where he highlighted the persistence of a global oil-price shock linked to the war in the Middle East as a key inflation risk.

“The question we’re going to be asking ourselves is: Is inflation likely to come back down toward our [2-percent] 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?”

Since Macklem’s remarks, Brent crude has hovered near US$115 a barrel and West Texas Intermediate around US$101, prompting market participants to raise the perceived probability of a rate hike to about 80 %. Analysts note that headline inflation in Canada stood at 3.1 % in September, driven largely by higher energy costs, while broader price pressures remain modest.

In the United States, the Federal Reserve is widely expected to keep its target for the federal funds rate steady at the current level when it meets later today. The central bank raised rates by a quarter-point in September and is projected to resume tightening in December, with markets pricing in three additional quarter-point hikes by the end of 2027. Fed Chair Kevin Warsh is not anticipated to provide forward guidance during the post-decision press conference.

Both central banks face external uncertainties. Canada’s outlook is tied to oil price dynamics and the status of trade negotiations between Ottawa and Washington, where Prime Minister Mark Carney hopes to secure a deal with U.S. President Donald Trump. Meanwhile, the Fed is navigating the political environment ahead of the U.S. midterm elections, which may temper any near-term policy shifts.