Bank of Canada may raise interest rates next week for first time in three years
Economists expect a hike as early as Oct. 28 to combat inflation driven by high energy prices.
The Bank of Canada may raise its key interest rate next week for the first time in more than three years as it tries to get ahead of stubborn inflation.
Governor Tiff Macklem warned on Saturday that inflation is expected to be "quite a bit higher" than the bank's last forecast, and said it may need to raise borrowing costs if energy prices remain raised.
"The question we’re going to be asking ourselves is, is inflation likely to come back down towards our target on its own, or are we going to have to raise interest rates to influence the path?" Macklem said in Bangkok.
The bank's policy rate has been held at 2.25 per cent since a quarter-point cut in October 2025.
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According to Bloomberg data, traders in the overnight swap market now put the odds of a 25-basis point rate hike from the Bank of Canada next week at 87 per cent.
Several major financial institutions, including the Bank of Montreal, RBC Dominion Securities and Desjardins Group, have flipped their predictions for the Oct. 28 announcement from a hold to a hike.
"That is really what flipped the script for us a little bit and put us in the camp of expecting a Bank of Canada rate hike in October," said Randall Bartlett, deputy chief economist at Desjardins.
Derek Holt, head of capital markets economics at Scotiabank, and Macquarie Group economist David Doyle are also among those calling for a rate hike.
"It's not a slam dunk call, but there is probably enough supporting evidence for a hike," Holt wrote in a research note.
Doyle predicts the Bank of Canada will raise its policy rate by 125 basis points by the end of 2027.
Consumer price inflation in September was measured at 3.1 per cent, mainly because of higher gas prices, and the consumer price index has been at or above three per cent for three straight months.
Macklem has said rising oil and gas prices are a risk to inflation, warning that the longer they stay high, the more likely it is that inflation becomes entrenched.
"If energy prices go higher, and particularly if they stay higher for longer, there could well be a need to increase the policy rate to get inflation back to two per cent," Macklem said in August.
Higher rates would have significant impacts on Canada's real estate market, according to mortgage and debt experts.
Payments on variable-rate mortgages would rise immediately, along with rates for new fixed mortgages.
"The housing market is kind of on its knees right now, and rising rates is like tossing a drowning guy an anchor," said Scott Terrio, manager of consumer insolvency at Ontario-based Hoyes Michalos & Associates.
The volume of home sales across the country is currently at a 25-year low, says Ben Rabidoux of Ontario-based Edge Realty Analytics.
"The reality is that when we look at per capita home sales, we're already back to 1990s levels, which [was] a really terrible recessionary environment," he said.
If interest rates start rising, Rabidoux says a gradual drop in home prices "over the next three or six months is very plausible."
Last week, the Canadian Real Estate Association downgraded its forecast for 2026 home sales activity for a third straight quarter, referencing a "notably more hawkish tone from the Bank of Canada."
The Bank of Canada's next interest rate announcement is scheduled for Oct. 28.
With files from Global News, CBC News and Forex Factory