Bank of Canada Rate Hike Odds Jump Amid Global Energy Price Pressures

Traders are increasingly betting that the Bank of Canada will raise interest rates as early as next month, ending its string of rate holds. The central bank has kept its policy rate unchanged at 2.25 per cent for nearly a year now, waiting to see how the economy and inflation adjust to recent shocks.

The odds of a rate hike have jumped in recent weeks, with the latest data showing that markets now see the Bank of Canada's next decision on October 28 as a coin flip. Before the central bank's September 2 decision to leave the policy rate unchanged, odds were overwhelmingly in favour of a hold.

The shift in odds is likely due to persistently high global energy prices tied to the war in Iran, according to Claire Fan, senior economist at RBC. Market expectations for future Bank of Canada hikes are also reflected in longer-term bond yields, which have risen in response to concerns over inflation and rising global bond yields.

While some economists remain unconvinced that the central bank will raise rates this year, the Federal Reserve's decision to deliver a rate hike in the US has added pressure on the Bank of Canada to follow suit. Both Fan and Randall Bartlett, deputy chief economist at Desjardins, expect the Bank of Canada to remain on the sidelines for the rest of the year before delivering a rate hike in the first quarter of 2027.