Bank of Canada Rate-Hike Outlook Flips as Most Economists Now Expect Two Increases by March

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Canada’s interest-rate outlook has changed with remarkable speed. After months in which the Bank of Canada appeared likely to leave borrowing costs untouched, a majority of economists now expect policymakers to raise the overnight rate by a quarter point on October 28 and deliver another increase by the end of March 2027. That would lift the policy rate from 2.25% to 2.75% in two steps.

The shift reflects a new mix of risks. Headline inflation has moved slightly above the Bank’s control range, energy prices remain elevated, and recent business and consumer surveys show inflation expectations becoming less comfortable. At the same time, Canada’s labour market is soft and growth remains modest. The result is an unusually delicate decision: the Bank may tighten not because the economy is overheating, but because it wants to stop another inflation problem from becoming entrenched.

The Rate Forecast Has Flipped Remarkably Quickly

The most striking part of the new outlook is how quickly the consensus changed. In a Reuters poll conducted from October 21 to 23, 19 of 34 economists, or 56%, predicted a 25-basis-point increase at the Bank of Canada’s October 28 meeting. Just one poll earlier, 80% of respondents expected the Bank to keep its policy rate at 2.25% through the end of 2026, while roughly two-thirds expected no change through March 2027.

That is more than a minor adjustment to timing. The Bank has kept the rate at 2.25% since October 2025, creating a long stretch of stability after several years of large changes in borrowing costs. Now, 16 of 29 economists in the newest poll also expect a second increase by the end of March, taking the rate to 2.75%. If that path materializes, Reuters says it would amount to the shortest Bank of Canada tightening campaign in 30 years—two relatively small moves designed to get ahead of inflation rather than a lengthy cycle.

Inflation Has Edged Above the Bank’s Control Range

September’s inflation report gave the case for tighter policy more urgency. Statistics Canada reported that the consumer price index rose 3.1% from a year earlier, up from 3.0% in August. That placed headline inflation just above the upper edge of the Bank of Canada’s 1% to 3% control range and well above its 2% midpoint. Gasoline prices were the biggest driver, rising 27.8% from a year earlier.

The underlying picture is less alarming, which is why the decision remains difficult. Excluding gasoline, inflation was 2.2% in September, suggesting that much of the headline pressure still comes from energy rather than a broad acceleration across the entire consumption basket. The Bank can look through temporary price shocks rather than react mechanically to every CPI increase. What matters now is whether the energy surge stays isolated. If higher costs begin spreading into transportation, food, services, wages and business pricing decisions, a temporary shock can become much harder to contain.

Oil Is Becoming Harder for Policymakers to Ignore

For much of 2026, the Bank of Canada treated higher energy prices as a shock that could eventually fade without requiring a major policy response. That approach becomes harder to defend the longer oil remains expensive. Oil reached $117 a barrel on October 23, according to Reuters, while the Bank has repeatedly warned that disruptions linked to the Middle East conflict and constrained refinery capacity could keep energy costs elevated for longer than previously assumed.

The distinction matters because central banks generally do not raise rates simply because gasoline becomes more expensive for a few months. Higher borrowing costs cannot produce more oil or repair damaged refining capacity. The concern is what economists call second-round effects. Businesses may pass higher transportation and input costs to customers, workers may seek larger wage increases, and households may begin expecting prices to keep rising. In September, the Bank said there was still little evidence of broad spillovers, but it also concluded that the risk of those spillovers was increasing as elevated energy costs persisted.

Inflation Expectations Are Becoming a Bigger Concern

The Bank’s latest surveys help explain why economists changed their calls even though underlying inflation remains relatively contained. In the third-quarter Business Outlook Survey, firms said expected growth in input costs and selling prices had moderated but remained elevated. More importantly, inflation expectations collected after Canada-U.S. trade talks broke down rose alongside renewed energy-price pressures and new tariffs. Roughly half of firms facing unusually large cost increases planned to pass at least some of those costs to customers.

Households are also showing more concern. The Bank’s Canadian Survey of Consumer Expectations found that long-term inflation expectations rose to match already elevated shorter-term expectations. Consumers continued to identify tariffs, trade tensions and energy prices as major sources of inflation. Expectations matter because they influence behaviour. If businesses set prices assuming inflation will remain high and households make wage and spending decisions based on similar assumptions, inflation can become self-reinforcing. Preventing that change in psychology is one reason a central bank might raise rates before broad inflation becomes obvious in monthly data.

Macklem’s Comments Changed the Calculation

Governor Tiff Macklem’s comments from the IMF meetings in Bangkok became another major catalyst for the forecast shift. On October 17, he said the Bank expected to raise its inflation forecast significantly in the October Monetary Policy Report because crude oil and petroleum-product prices had remained high. He also emphasized that the possibility of inflation becoming broader and more persistent had increased as the Middle East conflict continued and energy disruptions lingered.

Those remarks carried extra weight because the October 28 decision will arrive alongside a fresh set of Bank of Canada growth and inflation projections. A materially higher inflation path makes it harder to justify leaving the policy rate unchanged without a convincing reason to believe those pressures will fade naturally. Macklem framed the coming decision around whether inflation is likely to return toward 2% without intervention or whether interest rates will need to influence that path. Several economists interpreted that change in emphasis as a sign policymakers were becoming less willing to wait for broader inflation to emerge before responding.

Canada’s Weak Job Market Still Argues for Caution

The strongest argument against immediate rate hikes is Canada’s labour market. Statistics Canada reported that employment fell by 68,000 in September after a 42,000 decline in August. The unemployment rate rose to 6.5%, while the employment rate slipped to 60.6%. The labour-force participation rate fell to 64.8%, its lowest level since December 1997 outside the exceptional conditions of 2020. Average hourly wages were up a relatively modest 2.3% from a year earlier.

Those numbers do not describe an economy suffering from excessive demand. They suggest employers are becoming more cautious and that workers are finding it harder to move quickly into new jobs. Manufacturing lost 13,000 positions in September, while employment also declined sharply in education and health care. Raising rates into that environment risks weakening hiring, housing activity and household spending further. That helps explain why forecasters expecting hikes generally envision a measured two-step adjustment rather than anything resembling the rapid tightening Canadians experienced during the earlier post-pandemic inflation fight.

Economic Growth Is Not Strong Enough to Make This Easy

Canada’s growth outlook is better than it was at the weakest point of the recent slowdown, but the economy is hardly booming. The latest Reuters poll projects real GDP growth of approximately 1.0% in 2026 and 1.7% in 2027. Economists estimated that annualized growth slowed to 1.9% in the third quarter from 3.3% in the second quarter and could ease further to roughly 1.3% during the final three months of 2026.

The Bank’s July Monetary Policy Report told a similarly restrained story, projecting 0.7% growth in 2026 before an acceleration to 1.8% in both 2027 and 2028. Since then, renewed U.S. tariffs and trade uncertainty have complicated the recovery, even as elevated oil prices provide some support to Canadian export income and energy investment. Policymakers therefore face an awkward combination: weak domestic momentum alongside external forces pushing inflation higher. A rate increase under those conditions would be defensive rather than celebratory—an attempt to preserve price stability while accepting the possibility of somewhat weaker demand.

Financial Markets Have Already Repriced the Risk

Financial markets moved faster than the economist consensus. Reuters reported that interest-rate futures went from assigning roughly a 30% probability to an October increase to around a three-in-four likelihood within days. By October 21, investors were pricing roughly an 80% chance of a quarter-point hike. The Canadian dollar strengthened at the same time, trading near a four-week high against the U.S. dollar as investors adjusted to a more hawkish Bank of Canada outlook.

The repricing also showed up in interest-rate differentials. On October 22, the gap between Canadian and U.S. two-year government bond yields narrowed by 11 basis points, reducing part of the interest-rate advantage previously enjoyed by U.S. assets. None of this guarantees that the Bank will raise rates; market probabilities can shift rapidly after a weak jobs report, inflation surprise or geopolitical development. It does show, however, that October 28 is now viewed as a genuinely live decision. Financial conditions can also tighten before the Bank acts because currencies, bond yields and lending markets respond to expectations about future policy.

Borrowers Would Feel Two Rate Hikes Quickly

Two quarter-point increases would lift the policy rate from 2.25% to 2.75%, a cumulative increase of 50 basis points. The Bank of Canada does not directly set retail mortgage or consumer-loan rates, but changes in its overnight target generally influence the prime rates charged by commercial banks. Variable-rate mortgages, adjustable-rate mortgages, home-equity lines of credit and other prime-linked loans are consequently among the products most directly exposed to another tightening cycle.

The impact would vary depending on the contract. Some variable mortgages have payments that change when rates move, while others maintain the same scheduled payment for a period and direct a larger portion toward interest. Fixed mortgage rates are influenced more heavily by bond yields and lenders’ funding costs, meaning they can rise before an official Bank decision when markets anticipate tighter policy. Savers sit on the opposite side of that transmission mechanism because higher interest rates can also support returns on deposits and guaranteed investment certificates. Even two modest hikes could therefore produce noticeably different outcomes depending on whether a household is primarily borrowing or saving.

Two Hikes by March Remains a Forecast, Not a Promise

Even after the dramatic change in expectations, the projected rate path is far from guaranteed. The Bank of Canada has four scheduled decisions between now and the end of March: October 28, December 9, January 27 and March 3. The October and January announcements will also include full Monetary Policy Reports, giving policymakers opportunities to reassess inflation and growth as more data become available.

That means “two increases by March” should be understood as the current economist base case rather than a commitment from the Bank. A sustained decline in oil prices, falling inflation expectations or a sharper deterioration in employment could eliminate the need for a second move. Broader price pressures, stubborn energy costs or further evidence that inflation expectations are becoming unanchored could strengthen the case for faster tightening. The Bank has spent much of 2026 trying to look through supply-driven inflation without allowing it to become permanent. The latest forecast reversal suggests economists increasingly believe that balance has shifted—and that small insurance hikes may now be the Bank’s preferred response.

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