Bank of Canada Poll Points to a Rate Hike to 2.50% on Oct. 28

The Bank of Canada will raise its overnight rate by 25 basis points to 2.50 percent on October 28 and follow with one more hike by the end of March, according to a majority of economists polled by Reuters. The poll, taken from October 21 to 23, found 19 of 34 economists, or 56 percent, expect the hike. It would be the bank first move in a year.

The change in view is steep. In the previous poll, 80 percent of respondents forecast the bank would hold its rate at 2.25 percent until the end of 2026, and two thirds forecast a hold until the end of March 2027. Interest rate futures have moved with the economists. Markets went from pricing in about a 30 percent chance of an October hike to around three in four, and investors now see roughly an 80 percent chance of a hike next week.

Why the view flipped

Inflation rose to 3.1 percent in September, just above the bank target range of 1 to 3 percent. The bank latest business outlook survey showed inflation expectations rising sharply, in the run up to a recent breakdown in trade talks with the United States, Canada main export destination. Governor Tiff Macklem told reporters on Saturday that the bank quarterly inflation forecasts, also due next week, are likely to be revised higher. Markets read those remarks as a hint that a rise is coming.

Royce Mendes, managing director and head of macro strategy at Desjardins, said the survey responses changed both the governor tone and the economists view. He said the responses suggest more serious inflationary pressures are coming, and that the governor had likely seen the results before they were published on Monday.

Retail sales backed the case on Friday

New data on Friday pointed the same way. Canadian retail sales rose 1.2 percent in August from July to 74.57 billion Canadian dollars, Statistics Canada said, reversing a 0.7 percent drop in July. Sales rose in all nine subsectors. Core retail sales, which strip out gasoline stations, fuel vendors and motor vehicle dealers, rose 1.1 percent. Sales at motor vehicle and parts dealers rose 1.2 percent and contributed the most to the gain, while food and beverage sales rose 1.1 percent. A flash estimate put September sales up 0.7 percent.

The Canadian dollar strengthened to a five week high on Friday. It traded 0.1 percent higher at 1.40 per US dollar, after touching 1.3969, its strongest level since September 16. That left the currency on track for a seventh straight day of gains, which would be its longest winning run since March 2022, and up 1 percent for the week. Oskar Stone, an analyst at Desjardins, said the spending numbers point to third quarter GDP growth of 2 percent and support a rate increase next week. Canada 10 year bond yield rose 5.1 basis points to 3.838 percent. US crude oil settled 3.8 percent higher at 103.27 dollars a barrel after attacks in Saudi Arabia raised concern about energy supply.

What happens next

The decision lands on Tuesday, October 28, with the bank new quarterly forecasts published the same day. A hike would raise borrowing costs for households and firms at a time when trade friction with the United States is already a drag. Holding would leave inflation expectations to settle on their own. The poll says most economists now think the bank will act first and explain with the forecasts beside it.