The odds of a Bank of Canada interest rate hike at its October 28 meeting have shifted dramatically in the span of a few days, driven by hawkish comments from Governor Tiff Macklem and fresh survey data showing Canadians’ inflation expectations are climbing. By late afternoon Monday in Ottawa, traders in overnight swaps were pricing in an 80% probability of a rate hike — up sharply from roughly 35% just the previous Friday, a swing that reflects how quickly market sentiment can pivot when a central bank governor speaks plainly.
The catalyst was Macklem’s appearance at an International Monetary Fund event in Thailand over the weekend, where his tone signalled that the Bank is prepared to tighten borrowing costs despite recent data that came in softer than feared. On Monday morning, Statistics Canada reported that inflation accelerated to a 3.1% annual pace in September, a figure that actually fell below analyst expectations in a Bloomberg survey. Bond markets largely shrugged off the release, continuing to sell off across the curve, suggesting investors were already looking past the headline number toward the central bank’s forward guidance.
Why are economists and traders changing their calls so quickly?
Three major financial institutions — Bank of Montreal, RBC Dominion Securities, and Desjardins Group — all reversed their positions on Monday, shifting from expecting the Bank to hold rates to predicting a 25-basis-point increase that would bring the key lending rate to 2.50%. Scotiabank’s head of capital markets economics, Derek Holt, argued that money markets have read the situation correctly. “Backward looking Canadian CPI for one month was probably doomed to be immaterial before it landed given BoC Governor Macklem’s forward-looking warnings,” Holt wrote in a note to clients, adding that the trend continues to justify tightening at next week’s meeting. Manulife went further still, maintaining its forecast for back-to-back increases — one this month and another in December.
The Monday rate-hike momentum was reinforced by the Bank of Canada’s own business and consumer outlook surveys, released the same day. Those surveys found that consumers’ longer-term inflation expectations are rising, and that roughly half of Canadian firms plan to pass some or all of the cost increases stemming from higher oil prices and trade tariffs directly on to customers. That combination — elevated energy prices, ongoing trade war pressures, and rising consumer inflation expectations — forms a picture that is difficult for a central bank to ignore, even when a single month’s CPI reading comes in mild.
Shelly Kaushik, an economist with Bank of Montreal, summarized the tension plainly: “Despite this morning’s milder-than-expected CPI report, inflation risks remain tilted to the upside given the trade war and still-elevated energy prices, with no end in sight to either shock.” That framing captures why markets have chosen to weight Macklem’s forward-looking warnings more heavily than a single backward-looking data release. Several other Bay Street forecasters also shifted their October 28 calls from hold to hike on Monday, though a rate increase remains a minority view among the broader analyst community — meaning the debate is far from settled heading into next week’s decision.
