Bank of Canada rate hike expectations surge amid rising energy prices

Expectations are mounting that the Bank of Canada will raise its benchmark interest rate this week as central bank policymakers weigh the economic impact of surging energy prices. According to data from LSEG Data & Analytics, financial markets were pricing in nearly a 78% probability of a rate hike by Friday afternoon.

The central bank has held its key policy rate steady at 2.25% for seven consecutive policy meetings. However, RBC economists informed clients in a research note on Thursday that they now anticipate a quarter-point increase, stating that the central bank faces a "pivotal turning point" amid shifting macroeconomic conditions.

The shift in market sentiment is primarily driven by recent inflation metrics. Data released last week by Statistics Canada revealed that the annual inflation rate ticked up to 3.1% in September, fueled by rising fuel prices stemming from conflict in the Middle East. Meanwhile, the labor market showed signs of weakening, with StatCan reporting a loss of 68,000 jobs in September—marking a second straight month of employment declines.

Despite predicting an increase, RBC economists noted that their conviction behind a rate hike this week remains conditional, acknowledging a strong possibility that the Bank of Canada could instead use the upcoming meeting to signal a potential rate increase for December or January. RBC Assistant Chief Economist Nathan Janzen highlighted in an interview that recent public remarks from Bank of Canada Governor Tiff Macklem significantly contributed to driving up market expectations for a rate move.