Is the Bank of Canada (BoC) Going to Raise Rates Tomorrow?

Just a few weeks ago, the central Bank was expected to keep interest rates unchanged for the rest of the year. However, statements by Governor Tiff Macklem at an International Monetary Fund (IMF) meeting significantly changed that outlook.

What did he say that caused such concern among economists?

During a break at the IMF meeting, Macklem said higher energy prices from the conflict in Iran were boosting economic growth and raising inflation risk. His comments seemed significant, especially given the BoC’s more hawkish stance since early September.

As a result, markets now price in a 76 percent chance that the BoC will raise its policy rate to 2.5 percent this Wednesday, prompting many of the country’s leading economists to revise their forecasts.

CIBC’s chief economist, Avery Shenfeld, noted, “We can’t see why Macklem would have hastened to make these comments at the IMF meeting—just before the Bank’s media blackout—other than to signal an October hike.”

While the economists may have changed their forecasts, their concerns remain. Frances Donald, chief economist at the Royal Bank of Canada (RBC), said her team expects a rate hike on Wednesday not because it’s necessary, but because of the central Bank’s recent communications.

RBC believes there is “a strong case for patience,” as little evidence suggests rising energy prices are affecting broader inflation or that the recovering Canadian economy is ready to handle further shocks. For instance, the housing market is still in a downturn, and upcoming gross domestic product data is expected to show that growth slowed in the third quarter.

RBC also pointed out that bond yields have risen more than 40 basis points over the past three months, tightening financial conditions without requiring a rate hike.

Shenfeld expressed concern at CIBC, saying they would “respectfully beg to differ” if the central Bank raises rates tomorrow. “We worry that this could be a policy error, as we aren’t yet convinced that any rate hikes will be warranted in the coming year. Thus, moving too early could result in future regret for the Bank,” he wrote.