Canada's Rate Outlook Hinges on Energy Prices and Trade Uncertainty

Canada's Bank of Canada is facing a tough decision ahead of its October 28 rate announcement. Governor Tiff Macklem warned that higher borrowing costs remain possible, but this will depend on whether energy inflation spreads beyond fuel prices.

The bank's preferred core measures have held near 2% year-over-year, indicating that broader price pressures have yet to take hold. However, gasoline prices are up 23% from a year ago, and the Bank of Canada has expressed concern about the risks of delay in addressing inflation.

Macklem emphasized that if policymakers wait too long to act, they may need to raise rates quickly and potentially more than they would have otherwise. The two-year Government of Canada bond yield has risen over 40 basis points in recent weeks as fixed-income traders price in rate increases.