Canada

Bank of Canada poised for first interest rate hike in more than three years

Economists and traders see high odds of a rate increase to combat inflation driven by energy prices.

By Elise Tremblay, Editor-in-Chief
October 21, 2026

The Bank of Canada is expected to raise its key interest rate next week for the first time in more than three years. Economists and traders are increasingly betting on a hike as the central bank confronts stubborn inflation, driven in part by raised energy prices. The policy rate has been held at 2.25 per cent since a quarter-point cut in October 2025. Bank of Canada Governor Tiff Macklem warned recently that borrowing costs may need to rise if energy prices remain high, citing the unresolved conflict in the Middle East that has roiled global markets.

According to Bloomberg data, traders in the overnight swap market now put the odds of a 25-basis point rate hike at the Oct. 28 announcement at 87 per cent. Several major financial institutions, including the Bank of Montreal, RBC Dominion Securities and Desjardins Group, have changed their forecasts this week from predicting a hold to predicting a hike. Derek Holt, head of capital markets economics at Scotiabank, is among those calling for an increase. "It's not a slam dunk call, but there is probably enough supporting evidence for a hike," he wrote in a research note.

Macquarie Group economist David Doyle predicts the Bank of Canada will raise its policy rate by 125 basis points by the end of 2027. "Our baseline case remains for a rate hike at this month's meeting," he wrote. Leah Zlatkin, a licensed mortgage broker with LowestRates.ca, agrees a hike is likely and expects it to be part of a cycle. Higher rates would immediately affect payments on variable-rate mortgages and could increase rates for new fixed mortgages if bond market investors anticipate further hikes.

The potential shift comes as Canada's housing market shows significant strain. The volume of home sales across the country is currently at a 25-year low, according to Ben Rabidoux of Edge Realty Analytics. He describes buyer confidence as "unbelievably weak" due to economic uncertainties. "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," Rabidoux said. If rates rise, he says a gradual drop in home prices over the next three to six months is very plausible.

Scott Terrio, manager of consumer insolvency at Hoyes Michalos & Associates, said higher rates would further stress the market. "The housing market is kind of on its knees right now, and rising rates is like tossing a drowning guy an anchor," he said. The Canadian Real Estate Association recently downgraded its 2026 home sales forecast for a third straight quarter, citing a "notably more hawkish tone from the Bank of Canada." It now expects 444,530 homes to be sold by year-end, a 5.2 per cent drop from 2025.

Statistics Canada reported on Monday that inflation rose to 3.1 per cent in September, pushed higher by fuel prices. The report noted that rising fuel prices have yet to meaningfully spill into other sectors, but the Bank of Canada's latest business survey found companies are bracing for higher prices. The central bank's mandate is to promote economic welfare by ensuring price stability. Its last rate increase was in July 2023. The U.S. Federal Reserve raised its key policy rate last month for the first time in three years, after U.S. inflation in August topped 3.4 per cent.

Zlatkin noted that recent price drops in expensive markets like Toronto could present a buying opportunity. "There's a possibility [that] housing prices are going to continue falling, but the reality is, if you'll qualify for the property today, then you'll qualify again later on if rates rise," she said. The Bank of Canada's decision will be announced on Oct. 28.

With files from Global News, CBC News and Forex Factory