Markets see 81% odds of Bank of Canada hike to 2.50% as economists split

Since a rate increase is almost entirely priced in, the loonie's response will probably hinge on the Monetary Policy Report and what the bank says about the path ahead, not on the decision itself. Holding rates steady would catch markets off guard, likely knocking the Canadian dollar down and dragging short-term Canadian yields lower. A hike paired with a signal that more tightening is coming would lift the currency and push the front end up, while a message of “one and watch” could lead the market to scale back bets on a further move by March. The outside variable is oil: higher crude both boosts headline inflation for Canada and gives the commodity-sensitive loonie support, meaning further energy gains would make the tightening case stronger. Whatever guidance the bank provides could quickly be put to the test on Friday, when August GDP arrives.

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A full calendar lies ahead — and the obvious issue has not even been brought up yet.

• Bank of Japan preview: Daiwa expects no move, though a 2% inflation projection may leave room for a December increase
• Central bank preview: RBNZ likely to take OCR to 3% before the vote, with oil and a soft kiwi stoking price pressures

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Seven days ago, the Bank of Canada seemed poised to leave policy alone, but a single Macklem remark about stronger inflation projections has made its first rise in a year a clear possibility.

Key points:

• The BoC delivers its decision on Wednesday; futures put an 81% probability on a 25 bp increase to 2.50%, a first change in twelve months.
• 19 of 34 economists surveyed by Reuters predict a hike, and most expect an additional one by March 2027; the earlier survey showed 80% anticipating no move through 2026.
• Tiff Macklem, the governor, indicated that the bank's inflation projections would probably be marked up, and markets interpreted that as a sign of policy tightening.
• HSBC sees survey evidence, especially higher long-run consumer inflation expectations, as supporting a rate rise even with weak hard data.
• TD is not as convinced as the market, pointing to narrow inflation and near-term uncertainty.
• Wednesday at 09:45 ET (13:45 GMT) brings the rate call and Monetary Policy Report, with August GDP arriving Friday.

Wednesday is expected to bring the Bank of Canada's first interest-rate increase in a year: markets place an 81% probability on a 25 basis point move to 2.50%. Still, some economists are not convinced the rise is warranted.

Market pricing has moved fast. In a Reuters survey carried out October 21-23, 19 of 34 economists predicted a hike this week, and most also saw another increase by the close of March 2027, which would bring the rate to 2.75%. That is a complete reversal from the earlier survey, in which 80% saw the rate staying at 2.25% through 2026.

Governor Tiff Macklem was the trigger. He told journalists the bank's quarterly inflation forecasts, due out with Wednesday's decision, would probably be revised upward. Markets read his words as a signal that tightening was ahead. Reuters noted that futures pricing for an October hike rose from about 30% before the comments to roughly three in four. Over the next week, a large number of economists moved from no-change to hike calls.

At HSBC, analysts argue that recent survey readings favour a rate increase, pointing especially to higher long-term consumer inflation expectations, even though the remaining hard data have been soft.

Not all economists are aligned with that view. TD's analysts say they are not as confident as the market that rates will go up, citing inflation's narrow scope and an uncertain near-term picture. Some others contend that energy-led price gains probably will not by themselves show up in underlying inflation, even as they expect action if price rises become broader. Earlier in the autumn, labour-market softness had also caused traders to shift expectations for a move toward December.

Wednesday's schedule has the policy decision and the Monetary Policy Report at 09:45 ET (13:45 GMT). With a rise mostly priced in, the central bank's revised forecasts and any guidance on future tightening should be what moves markets. Friday's August GDP release will serve as an early check on the economic outlook.