The Bank of Canada is expected to raise its overnight interest rate to 2.50% on October 28, followed by another increase by the end of March, as policymakers seek to prevent persistent inflation pressures from becoming entrenched. The outlook marks a sharp shift in expectations after months of forecasts pointing toward stable borrowing costs.
In an October 21–23 Reuters economist poll, 19 of 34 respondents, or 56%, predicted a 25-basis-point increase from 2.25% to 2.50% at the upcoming meeting. A further 16 of 29 economists expected another hike before the end of March 2027, potentially lifting the overnight rate to 2.75%. These figures represent economists’ forecasts, not confirmed central bank decisions.
Inflation is adding to the pressure. Canada’s annual inflation rate rose to 3.1% in September, slightly above the Bank of Canada’s target range of 1% to 3%. The central bank’s latest business outlook survey also indicated rising inflation expectations, raising concerns that price pressures could persist even as economic growth moderates.
Governor Tiff Macklem’s recent comments have further strengthened expectations of a rate increase. He indicated that the bank’s upcoming quarterly inflation forecasts would likely be revised higher, prompting financial markets to reassess the probability of tighter monetary policy. Interest-rate futures shifted from pricing in roughly a 30% chance of an October hike to around 75%.
However, the policy outlook remains complicated by weakness in the broader economy. Economic growth is expected to have slowed from 3.3% in the second quarter to 1.9% in the third quarter, with growth projected at just 1.3% in the current quarter. The poll forecasts annual economic growth of 1.0% in 2026 before improving to 1.7% in 2027.
Economists who expect the central bank to hold rates argue that a weakening economy and relatively subdued underlying inflation pressures could make further tightening risky. Rising oil prices add another complication, as higher energy costs can increase headline inflation while simultaneously putting pressure on consumers and businesses.
The debate reflects a difficult balancing act for policymakers. Raising rates could help contain inflation expectations and reduce the risk of repeating the policy mistakes of 2021–2022, when inflation accelerated sharply. But tightening too aggressively could further weaken economic activity and increase borrowing costs for households and businesses.
If the forecasts prove accurate, the Bank of Canada could begin a short tightening cycle, raising rates to 2.50% in October and potentially to 2.75% by March. Economists expect the overnight rate to remain at that level afterward, although the path will depend on incoming inflation, employment and growth data.
For financial markets, the October decision and the central bank’s forward guidance will be critical. A rate hike accompanied by warnings about persistent inflation could support the Canadian dollar while putting pressure on interest-sensitive assets. A hold, particularly if accompanied by concerns about slowing growth, could trigger a different market reaction as investors reassess the expected policy path.
