Odds of an interest rate hike from Bank of Canada this year have jumped

Odds of an interest rate hike from Bank of Canada this year have jumped

OTTAWA — Traders are increasingly betting that the Bank of Canada could end its string of interest rate holds and deliver a hike as early as next month.

While many economists remain unconvinced that the central bank will raise the cost of borrowing this year, concerns that inflation could become a more persistent thorn than first thought have some pencilling in a tightening cycle to start in early 2027.

The U.S. Federal Reserve broke its own stand-pat stance and delivered the United States' first rate hike in more than three years on Wednesday in an effort to rein in inflationary pressures bubbling up south of the border.

The Bank of Canada has sat comfortably on the sidelines for nearly a year now, content to leave its policy rate unchanged at 2.25 per cent as it waits to see how the economy and inflation will adjust to a series of shocks.

In the days leading up to each of the Bank of Canada's six meetings so far in 2026, financial market odds have overwhelmingly been in favour of rate holds.

Before the central bank's Sept. 2 decision to leave the policy rate unchanged, odds of a hold were pegged at 94 per cent, according to LSEG Data & Analytics.

With over a month to go until the Bank of Canada's next decision on Oct. 28, markets now see that meeting as a coin flip. Odds have fluctuated sharply over the past few weeks, but stood narrowly in favour of a hike as of Thursday afternoon.

Claire Fan, senior economist at RBC, said bond market pricing can be viewed as something of a consensus expectation for central bank decisions and also as a barometer for how market participants are viewing fresh economic data.

Odds had already been titled in favour of a Fed hike but soared after the U.S. inflation data release a few days earlier, she noted.

In the Bank of Canada's case, the shift in odds toward a possible October hike are likely a reflection of persistently high global energy prices tied to the war in Iran, Fan said.

The Bank of Canada's governing council was worried late last month that oil prices were staying higher for longer, according to Wednesday's release of the summary of deliberations that led to its Sept. 2 rate decision.

While there have so far been few signs outside of airfares that high fuel costs are spreading beyond the gas pumps, the central bank's top decisionmakers agreed that the longer prices remain high, the greater the risk to inflation.

"If there's one thing that's really causing the pricing of the October meeting … it's oil prices," Fan said.

Market expectations for future Bank of Canada hikes are also reflected in longer-term bond yields.