Canadian Inflation Is Stuck at 3%. Markets Now Give an October Bank of Canada Hike 60/40 Odds.

From "no hikes this year" to a coin flip

On September 2, the Bank of Canada held its policy rate at 2.25% for the seventh straight meeting. Markets gave a hold about 94% odds. Almost nobody was talking about a hike.

Three weeks later, overnight index swaps, the market traders use to bet on Bank of Canada decisions, priced about a 60% chance of a quarter-point hike on October 28. That's up from about 30% at the start of September. At one point in the month the odds hit 75%.

What changed? Mostly oil, and the Federal Reserve.

What the August inflation report showed

Statistics Canada's August report, released September 14:

• Headline CPI: +3.0% year over year, unchanged from July
• Excluding gasoline: +2.4%, up from 2.2%
• Gasoline: +22.8%
• Rent: +2.8%, up from 2.5%
• Groceries: +2.8%, down from 3.1%, slower than overall inflation for the first time since July 2024
• Travel tours: +26.1%

The Bank of Canada targets 2% inflation, within a 1% to 3% range. Headline inflation is sitting right at the top of that range. The number that worries the Bank is the 2.4% excluding gasoline. It's rising, which suggests the energy shock is starting to leak into other prices.

Why the Fed matters to the Bank of Canada

The US Federal Reserve raised its rate to 3.75%-4.00% on September 16. That puts US rates at least 1.5 points above Canada's.

A wide gap tends to push the Canadian dollar down, because investors can earn more holding US dollars. A weaker loonie makes imports more expensive, which adds to inflation. The Bank of Canada can't ignore that.

Governor Tiff Macklem has pushed back on the idea that Canada must follow the Fed. "We can run a monetary policy in Canada that is geared to the situation in Canada," he said. But markets are betting that the pressure from oil and the currency will be hard to resist.

What economists expect

The forecasts are split:

• RBC (Claire Fan): a hold through the end of 2026, then a likely hike in early 2027. "If there's one thing that's really causing the pricing of the October meeting … it's oil prices," she said.
• Desjardins (Randall Bartlett): on hold through 2026, with a hike in Q1 2027.
• Capital Economics (Stephen Brown): no hike in October, "though it will likely be a close call."
• National Bank moved its hike call forward to December from January.

Economists lean toward waiting. Markets lean toward acting. That gap is the story.

What it means for your money

Variable-rate mortgages. A quarter-point hike adds roughly $13 to $14 a month for every $100,000 you owe on a variable-rate mortgage. On a $500,000 balance, that's about $65 to $70 a month. If two or three hikes would strain your budget, compare your lender's fixed-rate offer now.

Fixed-rate mortgages. These follow 5-year Government of Canada bond yields, not the Bank's rate directly. Those yields have already risen with US Treasuries. If you're renewing in the next few months, get a rate hold. Most lenders offer 90 to 120 days. See How Bond Yields Set Canadian Mortgage Rates.

GICs and savings. GIC rates rise when markets expect hikes. If you're holding cash, this is a better time to lock in than a month ago. A ladder, with money split across 1- to 5-year terms, avoids betting on one date. Compare options in GICs vs High-Interest Savings vs Cash ETFs.

Bonds and bond ETFs. Rising yields lower bond prices. If you hold a Canadian bond ETF, check its duration. Short-term bond funds hold up better when rates rise.

The loonie and US stocks. A wider Fed-BoC gap tends to weaken the Canadian dollar, which boosts the value of US holdings in Canadian-dollar terms. More in The Fed-Bank of Canada Gap Just Hit 1.5 Points.

What to watch before October 28

1. Oil prices. Talks between the US and Iran could bring prices down fast. Brent fell to about $104 on September 25 on hopes of a diplomatic deal.
2. September CPI, released in mid-October. Watch inflation excluding gasoline.
3. The Bank's Monetary Policy Report, published with the October 28 decision.
4. Tariffs. A US import ban on some Canadian goods starts September 29, which could weigh on growth and argue against a hike.

The honest uncertainty

The Bank of Canada faces two risks pulling in opposite directions: inflation from energy and a weak loonie, and slower growth from US trade action. Hiking into a trade shock could hurt. Waiting could let inflation settle in. Markets have called this year's hikes correctly so far, but a 60% chance still leaves a lot of room for a hold. Plan for both.

Frequently asked questions