Bank of Canada Rate Hike Odds Shift in Favor of Early Increase

Market expectations for an interest rate hike from the Bank of Canada have shifted in favor of a possible increase as early as next month, according to recent data.

The odds of a rate hike at the October meeting have narrowed, with markets now seeing it as a coin flip, down from 94% odds of a hold before the September decision to leave rates unchanged.

Claire Fan, senior economist at RBC, attributes this shift in odds to persistently high global energy prices tied to the war in Iran and the Bank of Canada's governing council's concern that oil prices will stay higher for longer, posing an increased risk to inflation.

Economists remain divided on whether a rate hike is imminent, with some predicting a tightening cycle starting in early 2027. The U.S. Federal Reserve delivered its first rate hike in over three years to combat inflationary pressures south of the border, which may have influenced market expectations for the Bank of Canada.

While some experts expect the central bank to remain on the sidelines for the rest of the year before delivering a rate hike in 2027, others believe that inflation risks and rising global bond yields make it more likely for the Bank of Canada to act sooner rather than later.