Bank of Canada Set for Rate Hike On Fear of Inflation Breakout

By Paul Vieira

OTTAWA--Most economists expect the Bank of Canada to raise its policy rate on Wednesday for the first time in more than three years, leaning heavily on Gov. Tiff Macklem's heightened concern about elevated fuel costs sparking an upswing in prices for nonenergy goods.

Analysts say the Bank of Canada might be keen to move now as its surveys point to higher inflation expectations among firms and households. The economy is also in relatively solid shape despite worries about the future of U.S.-Canada trade policy, with retail sales and exports exhibiting surprising strength.

Eleven of the 15 economists surveyed last week by The Wall Street Journal predicted a quarter-point Bank of Canada rate increase, which would take the target for the overnight rate to 2.50%. Four predicted another central bank hold.

The majority of analysts expect at least one more rate hike after that, given some underlying economic softness. Hiring intentions remain tepid, according to surveys by the central bank and business groups, and consumers likely face a spending squeeze with elevated fuel costs and a potential climb in broader prices.

The rate hike is likely to "be characterized as a risk management move in order to prevent the full extent of energy cost spillover that may occur if the Bank of Canada does not begin to act now," said Ethan Currie, economist at National Bank of Canada.

The swing toward a rate increase picked up steam 10 days ago after remarks from Macklem on the sidelines of an International Monetary Fund meeting in Bangkok. He told Canadian reporters the central bank's pending fourth-quarter forecast will show the inflation outlook to be "quite a bit higher" versus the prior quarter. This reflects pessimism for a near-term end to the Middle East conflict and a reopening of oil-tanker traffic in the Strait of Hormuz.

"The question we're going to be asking ourselves is, '[Will] inflation likely 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. The Bank of Canada sets interest rates to achieve and maintain 2% inflation.

The September inflation report indicated total inflation rose 3.1%, although the core consumer-price index--which strips out volatile items like food and energy--decelerated to just below 2%. Economists say the Statistics Canada report indicates higher crude-oil costs have yet to push prices higher for nonenergy goods.

Of more concern for policymakers, economists said, were the findings from the central bank's quarterly survey of businesses and households. The surveys indicated a sizable increase in inflation expectations among businesses, due to energy prices and an escalation in U.S-Canada trade tensions. More than half of firms suggested they intend to pass on higher-input costs to their customers. Meanwhile, consumers' long-term inflation expectations climbed to 4%, or on par with their near-term prediction for price increases.

"Inflation expectations are becoming somewhat de-anchored, something a 2% inflation-targeting central bank cannot ignore," said Sebastien Lavoie, chief economist at Laurentian Bank Securities. "We are clearly in a situation where core CPI will catch up to total CPI sooner rather than later."

He cited data for Canadian producer prices, or what manufacturers fetch for their wares once they leave the factory. Those prices rose 2% month-over-month in September and 14.5% from a year ago.

Not all economists believe a rate hike is warranted. Andrew Kelvin, head of Canada rates strategy at TD Securities, said there are few signs of broadening inflation pressure, and the growth outlook remains uncertain due to trade-policy uncertainty.

"We think an October hike would be reckless. Not necessarily wrong, but a needless risk," said Kelvin, although adding he does anticipate the Bank of Canada policy rate sitting at 2.75% by mid-2027.

Write to Paul Vieira at paul.vieira@wsj.com

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October 27, 2026 07:15 ET (11:15 GMT)