Bank of Canada poised to raise benchmark rate amid persistent oil price surge
Analysts expect the Bank of Canada to increase its policy rate for the first time in three years as oil prices remain high, though data on core inflation show mixed signals.
The Bank of Canada is expected to lift its benchmark interest rate on Wednesday, ending a three-year pause, as policymakers seek to curb inflation risks tied to soaring oil prices. Governor Tiff Macklem has warned that sustained crude prices near US$100 a barrel could push headline inflation above the 3 % level, prompting the bank to consider a rate hike despite recent data showing core inflation easing.
The central bank has kept the policy rate at 2.25 % since October, while the Canadian housing market remains weak and unemployment stays elevated. Trade tensions with the United States, including possible new tariffs on the auto sector, add further uncertainty.
“A rate hike might be a fine decision if things go well in future trade talks and energy prices stay high,” said Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce. “But it could prove to be a policy mistake if the trends go in the other direction for both oil prices and trade policy.”
Market expectations have shifted sharply, with Bloomberg data showing the probability of a quarter-point increase rising from about 35 % to nearly 90 % after Macklem’s remarks at the IMF meeting in Bangkok. Some analysts caution that the market may be overreacting to the governor’s comments, noting that annual consumer price inflation was 3.1 % in September, driven largely by a 6.1 % jump in gasoline prices, while core measures fell to around 2 %.
“In my view, the data on aggregate is not convincing to hike,” said Jeremy Kronick, CEO of the C.D. Howe Institute. “So to me, the market is reacting almost entirely to Governor Macklem’s comments in Bangkok.”
Nevertheless, a recent consumer survey showed a rise in longer-term inflation expectations, and businesses indicated plans to pass higher costs to customers, factors that could influence the bank’s decision.
“If the economy is normalizing, then there’s room for interest rates to normalize,” said Nathan Janzen, assistant chief economist at Royal Bank of Canada.
If the hike occurs, it would be the first since the post-pandemic tightening cycle ended in summer 2023, and could set the policy rate on a path toward 3.25 % by the end of 2027. For borrowers with variable-rate mortgages, the timing of the increase is less critical than the overall trajectory of rates, which have already risen in response to higher U.S. rates and expectations of further Canadian hikes.