Bets on Canadian Rate Hike Near 80% as Inflation Accelerates and Bond Yields Rise
Key Facts
The swaps market's implied probability of a Bank of Canada interest rate increase at its October 28 meeting rose to about 80% on Monday, October 19, according to Reuters, as annual inflation accelerated. The market had put the probability at 30% on Friday, before repricing expectations for the next decision. Canadian inflation rose to 3.1% in September from 3.0% in August, according to Investing.com, as energy price increases accelerated. Canadian government bond yields rose across the maturity curve during Monday's session, Reuters reported. In equities, Canada's composite index closed down 247.92 points, or 0.69%, at 35,928.63 as interest rate expectations were reassessed, according to Investing.com.
Annual inflation came in below the expectations of analysts polled by Reuters, who had forecast a September reading of 3.2%. Energy prices rose 19% year on year during the month, according to Investing.com, a faster pace than in the previous month. The annual increase in energy prices had been 15.4% in August. By contrast, the median measure of core inflation slowed to 1.9% in September, according to Reuters. The core inflation measure that excludes the most extreme price changes stood at 1.8%, diverging from accelerating headline inflation and rising energy prices.
Bank of Canada Governor Tiff Macklem said the bank expects to raise its quarterly inflation forecasts significantly this month, according to Reuters. He attributed the anticipated revision to persistently high oil and petroleum product prices, which are lifting the bank's projections for the inflation path. Macklem warned that "the risk of inflation becoming broader and more persistent has increased," pointing to the repercussions of the continuing conflict. His warning covered shipping disruptions accompanying the conflict, alongside higher oil and petroleum product prices. He also cited damage to refining capacity among the factors contributing to the increased risk of inflation persisting and spreading more widely.
The Bank of Canada's consumer expectations survey showed long-term inflation expectations rising to catch up with already elevated short-term expectations. Consumers identified trade tensions and energy prices as major sources of inflation, according to the survey. At the same time, household spending plans declined from levels the bank described as already weak. Business responses collected after the collapse of trade talks also showed rising inflation expectations, according to the bank's Business Outlook Survey. Those responses linked higher price expectations to new tariffs and a rebound in energy prices, alongside declining consumer spending plans.
On economic activity, the Bank of Canada said in the statement accompanying its previous decision that indicators showed continued excess supply in the economy. The Business Outlook Survey confirmed that most firms continued to report spare production capacity. On employment, most firms planned to keep staffing levels unchanged, according to the same survey. The bank held its target for the overnight rate at 2.25% in its September decision. Markets thus repriced the probability of tightening after a decision that kept borrowing costs steady, and amid the continued excess supply cited by the bank.
The Bank of Canada's next interest rate decision is due on October 28, 2026, according to its official events calendar. The bank has scheduled the announcement for 09:45 Eastern Time. It will publish its Monetary Policy Report on the same day, alongside the rate announcement. The report will include updated inflation and growth forecasts, following Macklem's statement that the bank expects to raise its inflation projections significantly this month. After releasing the decision and report, the bank will publish a summary of its deliberations on November 10, 2026, according to the official schedule.