Canada rate-hike bets near 80% after Macklem remarks despite below-forecast inflation
Key Facts
The probability priced into swaps markets of a Bank of Canada interest rate increase at its 28 October meeting rose to about 80% on Monday, 19 October, according to Reuters. Markets had put the probability at 30% on Friday, before bets on monetary tightening at the next decision increased. The agency said hawkish remarks by Governor Tiff Macklem overshadowed inflation data that came in below analysts' expectations. In the bond market, the Canadian ten-year government bond yield rose 11.1 basis points during Monday's session. The moves followed the bank's decision to hold its target overnight rate at 2.25% at its previous meeting.
Price data showed Canadian annual inflation rose to 3.1% in September, according to Reuters. The reading was below the 3.2% forecast by analysts polled by the agency but exceeded August's 3% rate. Meanwhile, the median measure of core inflation slowed to 1.9%, while the measure that excludes the most extreme price changes stood at 1.8% in September. Among price components, gasoline prices rose 27.8% from the same month a year earlier, according to Investing.com. Annual growth in shelter costs accelerated to 1.8%, following a 1.5% increase in August. The acceleration in headline inflation and rising shelter costs thus coincided with a slowdown in the median measure of core inflation.
In the business sector, firms' inflation expectations declined overall from the previous quarter, according to the Bank of Canada's Business Outlook Survey. However, responses collected after trade talks broke down showed those expectations rising, with the divergent trend linked to when responses were collected. Nearly half of businesses plan to pass some or all cost increases associated with the war in the Middle East and tariffs on to customers. The bank said firms' efforts to restore profit margins squeezed by earlier cost increases were among the reasons for planned selling price increases. Uncertainty over when inflation would return to target also increased, with more firms describing the timing as "very difficult to say."
Among households, consumers reported an improvement in their financial situations from the previous quarter, according to the Bank of Canada's Canadian Survey of Consumer Expectations. Even so, high prices for goods and services remained the main obstacle to their spending, despite the improvement they reported in their finances. About half of consumers believe the worst effects of trade tensions on inflation or the economy are still to come. Members of this group were more likely to postpone major purchases, according to the same survey. In the business sector, the share of firms planning or budgeting for a possible recession over the coming year fell to 6%, from 17% in the previous quarter.
The statement accompanying the bank's previous decision had pointed to gross domestic product growth of 3.3% in the second quarter. It cited a decline in the unemployment rate to 6.4% in July, alongside continued weakness in labour demand. The bank held rates steady at the time against that economic and labour market backdrop. As for the next decision, Macklem said the assessment centres on whether inflation will return towards target on its own. In remarks reported by Reuters, the governor put the potential need for tightening at the heart of that assessment, saying: "Or will we have to raise interest rates."
The Bank of Canada's next interest rate decision is due on 28 October 2026, according to its official events calendar. The bank has scheduled the announcement for 09:45 Eastern Time, with swaps markets having repriced the odds surrounding the decision. It will publish its Monetary Policy Report on the same day, alongside the rate announcement. Following the decision and report, the bank will publish its summary of deliberations on 10 November 2026, according to the official calendar. The summary is due at 13:30 Eastern Time.