The Bank of Canada heads into its Oct. 28 interest rate decision facing one of its tightest calls in nearly a year, as elevated oil prices and a shaky but resilient economy leave financial markets split over whether the central bank will finally end a long stretch of rate holds.
The central bank has kept its benchmark policy rate at 2.25 per cent since last October, pausing through all six of its 2026 meetings as it weighed the fallout from a U.S. trade dispute against the risk that high energy costs could spread into broader inflation. As of late September, odds of an October hike stood at roughly 53 per cent, according to LSEG Data & Analytics, up sharply from the 94 per cent odds of a hold priced in before the bank’s Sept. 2 decision.
Oil Prices Driving Market Bets
RBC senior economist Claire Fan said the shift toward pricing in a possible hike largely reflects persistently high global energy prices tied to the war in Iran. “If there’s one thing that’s really causing the pricing of the October meeting … it’s oil prices,” she said. The Bank of Canada’s governing council flagged the same concern in the summary of deliberations behind its September decision, noting worry that oil prices were staying elevated for longer and that the longer they remain high, the greater the risk to inflation.
Statistics Canada data show headline inflation held at three per cent in August, with gasoline prices up 22.8 per cent year-over-year, though that pace had slowed from 25.7 per cent in July. Excluding gasoline, consumer prices rose 2.4 per cent. Food price growth also decelerated, climbing 2.8 per cent annually — the first time in over a year grocery inflation trailed the headline rate — while rent prices accelerated to 2.8 per cent from 2.5 per cent a month earlier.
CIBC senior economist Andrew Grantham said underlying inflation measures have so far shown few signs that higher energy costs are broadening into other parts of the economy, and he expects the bank to hold rates given downside risks to growth from U.S. trade policy.
A Fragile Growth Picture
Complicating the decision is a wobbly growth trajectory. Statistics Canada reported real GDP was essentially flat in July, as gains in construction and utilities — boosted by a heat wave that drove up electricity demand — offset declines in manufacturing, mining, and trade. That followed an annualized 3.3 per cent growth rate in the second quarter. StatCan expects a 0.2 per cent gain in August, though new U.S. tariffs on a range of Canadian goods, which took effect Aug. 22, are expected to weigh more heavily on the economy in September and the fourth quarter.
TD Bank economist Marc Ercolao described the pattern as part of a “sawtooth” trajectory that has defined Canadian growth since last year. Bank of Canada deputy governor Toni Gravelle said at a Bloomberg event in New York that the central bank faces a “true dilemma” in balancing the energy price shock against the renewed trade dispute, and that policymakers will be watching how sustained the second-quarter recovery proves to be heading into the October decision.
What Comes After October
Despite the narrowing odds for an October move, most economists surveyed still expect the Bank of Canada to hold through the rest of 2026 and begin raising rates in the first quarter of 2027. Desjardins deputy chief economist Randall Bartlett noted that rising bond yields — partly driven by concerns over U.S. sovereign debt — are already tightening financial conditions for Canadian borrowers, giving the central bank some “wiggle room” to delay hikes.
Capital Economics forecast the Bank of Canada will ultimately deliver two quarter-point hikes next year, lifting the policy rate to 2.75 per cent — the middle of what the bank considers its neutral range. That outlook is notably more modest than market pricing, which anticipates roughly 1.25 percentage points of cumulative hikes by the end of 2027.
Key Figures Heading Into the October Rate Decision
Capital Economics pointed to trade uncertainty tied to U.S. Section 338 tariffs and Canadian product bans, along with weaker population growth after possible further tightening of immigration targets, as forces likely to keep a lid on inflation and limit how aggressively the bank needs to act. The firm projects real GDP growth of just 1.5 per cent next year, normalizing to two per cent in 2028.
BMO’s Benjamin Reitzes said upcoming jobs, inflation and GDP data for September, along with the Bank of Canada’s own business and consumer surveys, will likely carry more weight for the October decision than July’s flat growth reading. Capital Economics’ Stephen Brown said the bank will “inevitably upgrade its inflation forecasts” in its next quarterly outlook to account for elevated oil price assumptions, adding that his base case remains no hike in October, though he called it “a close call.”
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