Some economists expect the Bank of Canada to raise rates next week

The Bank of Canada has held its key interest rate steady for about a year, but some economists expect it could start raising rates as early as next week. Such a move would be the first hike in more than three years. The central bank recently warned that inflation is expected to keep rising, in part because of ripple effects from the Iran war and other factors.

Governor Tiff Macklem told reporters Saturday in Bangkok, on the sidelines of International Monetary Fund meetings, that the inflation outlook is expected to be “quite a bit higher” than in the bank’s July forecast. That forecast projected inflation would cool to about 2.5 per cent in the second half of this year. Speaking in Bangkok over the weekend, Macklem said the bank will ask whether inflation is likely to return toward its target on its own or whether interest rates will need to rise to influence its course.

Consumer price inflation was 3.1 per cent in September, mainly because of higher gasoline prices, and the consumer price index has been at or above three per cent for three consecutive months. Inflation has been near the upper end of the Bank of Canada’s target range, but has not surged out of control. Higher gasoline prices amid the Iran war have been largely concentrated in energy, clouding the underlying price growth known as core inflation, which has remained closer to two per cent for several months. Over the longer term, however, higher oil and gas prices can push up the cost of almost everything else, including food. Macklem has repeatedly said rising oil and gas prices pose an inflation risk, though there has been little evidence of broader spillover into consumer prices. As a result, recent higher inflation readings are being treated with some caution. He has warned that the longer oil and gas prices remain elevated, the more likely inflation is to become entrenched and require higher rates. In August, he said that if energy prices rise, particularly if they stay higher for longer, the policy rate may need to increase to bring inflation back to two per cent.

The Bank of Canada’s inflation-control range is one to three per cent, with a target of two per cent. Its benchmark rate has been 2.25 per cent since October 2025. The bank’s mandate includes promoting Canada’s economic and financial welfare by keeping prices for goods and services relatively stable while maintaining borrowing rates low enough for the economy to expand. Central banks typically raise benchmark borrowing rates to cool inflation. That can increase costs for Canadians and businesses with variable-rate mortgages and some car, tuition and business loans. Bringing down high inflation is key to affordability amid the higher cost of living, while wage and salary growth is also part of the affordability picture; higher borrowing costs may be one consequence of efforts to control prices.

Last month, the U.S. Federal Reserve raised its key policy rate for the first time in three years, after U.S. inflation topped 3.4 per cent in August. After the pandemic, when inflation peaked above eight per cent, some economists said the Bank of Canada waited too long to raise rates. The policy rate was then raised relatively quickly and aggressively, from an emergency low of 0.25 per cent in March 2022 to five per cent by July 2023. Robert Kavcic, a senior economist at BMO Capital Markets, said policy had been left too low for too long, forcing aggressive increases over a short period to bring inflation under control. He said the bank may now be looking back at that mistake and trying not to repeat it. Kavcic said BMO expects a very cautious series of rate hikes.

Derek Holt, Scotiabank’s vice-president and head of Capital Markets Economics, said in a statement Monday that the trend continues to warn the Bank of Canada to begin tightening next week. Scotiabank forecasts a 25-basis-point, or 0.25-per-cent, hike. Holt said the bank may take a different approach this time by acting pre-emptively rather than responsively. He said Macklem appears to be giving less weight to backward-looking data and more to a higher forward-looking inflation forecast and inflation risk, adding that the bank looks at trends rather than spot data. Holt also criticized Bank of Canada staff for repeatedly missing turning points in inflation risk and routinely underestimating it.

Randall Bartlett, deputy chief economist at Desjardins, said Macklem’s comments changed the firm’s outlook and put it in the camp expecting an October hike. Bartlett said the bank is trying to get ahead of higher headline and underlying inflation: the latter has not materially appeared yet, but the bank wants to prevent it from doing so.

All three economists expect the Bank of Canada to raise rates by 0.25 per cent next week. Bartlett also forecasts another 0.25-per-cent increase in January.

With files from The Canadian Press.