The Bank of Canada is at a critical juncture as it weighs its next move on interest rates. Analysts at RBC now anticipate a 25-basis-point rate hike on October 28th, the first since March 2022. However, this expectation is met with low conviction, as the central bank could just as easily signal a rate increase for December or January instead.
The case for patience remains strong. The Canadian economy is improving but still fragile, with weak job growth, sluggish housing markets, and trade disruptions adding complexity. August GDP data, due next Friday, is expected to show slower growth in Q3 after a surge in Q2. Additionally, government bond yields have already risen, reflecting market expectations of rate increases, and much of the borrowing by households and businesses is at fixed rates.
Despite this, the Bank of Canada's communication suggests a shift in its risk calculus. Policymakers appear less willing to wait passively for inflation to materialize, focusing instead on safeguarding against future risks from higher energy prices. This shift is influenced by the lessons of the post-pandemic inflation surge of 2022-23, which demonstrated how quickly supply-side shocks can impact the economy. West Texas Intermediate oil prices have averaged $95 a barrel since the last rate decision, 54% higher than the same period last year, adding to cost pressures.
A rate hike now would not significantly alter the medium-term economic outlook. RBC's base case forecast already assumed 100 basis points of increases in 2027. The focus will be on the Bank of Canada's communication regarding the expected path of interest rates ahead, including how many more hikes and when they might occur. Ultimately, the signal of a rate hike on October 28th underscores central banks' reduced patience for inflation and willingness to act preemptively.