Bank of Canada expected to raise rates next week, some economists say

The Bank of Canada has held its key interest rate unchanged for about a year, but some economists expect rates to begin increasing again as early as next week — which would be the first hike in more than three years.

This comes after a recent warning from the central bank that inflation is expected to keep rising as a ripple effect of the Iran war and other factors.

This comes after the U.S. Federal Reserve hiked its key policy rate last month for the first time in three years, and after U.S. inflation in August topped 3.4 per cent.

Tamping down red-hot inflation is key to making life more affordable for Canadians amid the heightened cost of living — along with increasing wages and salaries — but in order to achieve this, it may mean some will end up paying more to borrow money.

Central banks usually increase their benchmark borrowing rate to help cool down inflation, which can raise costs for Canadians and businesses with products like variable rate mortgages, and some loans for cars, tuition and business.

“The trend continues to provide the BoC [Bank of Canada] with a warning that it needs to get on with tightening next week. We forecast the Bank of Canada will hike 25bps [0.25 per cent] next week,” said Derek Holt, vice president and head of Capital Markets Economics at Scotiabank in a statement on Monday.

The Bank of Canada has a mandate to “promote the economic and financial welfare of Canada,” and this includes ensuring prices for goods and services remain relatively stable, while also keeping borrowing rates low enough to allow the economy to expand.

Its target range for inflation is between one and three per cent, with a target of two per cent, and its benchmark interest rate has been 2.25 per cent since October 2025.

Governor Tiff Macklem at the Bank of Canada spoke to reporters on Saturday in a press conference from the sidelines of the International Monetary Fund meetings in Bangkok, and said he expects the outlook for inflation will be “quite a bit higher” than it was in the central bank’s last forecast in July. That projection had inflation cooling to around 2.5 per cent in the second half of this year.

Consumer price inflation in September was measured at 3.1 per cent, which was mainly because of higher gas prices, and the consumer price index has been at or above three per cent for three straight months.

Although inflation has been hovering on the higher end of the central bank’s target range, it hasn’t necessarily spiked out of control. Elevated gas prices amid the Iran war have been mostly isolated, which has somewhat clouded the underlying price growth, known as core inflation, which has remained closer to two per cent for several months.

But over the long term, higher oil and gas prices can lead to higher prices for just about everything else, including food.

Macklem has said on several occasions that rising oil and gas prices are a risk to inflation, but there has been little evidence of broader spillover into consumer prices. This means that the recent higher inflation readings are being taken with a grain of salt.

However, Macklem warned that the longer oil and gas prices remain elevated, the more likely it is that it will lead to inflation becoming entrenched and rates will need to rise.

“If energy prices go higher, and particularly if they stay higher for longer, there could well be a need to increase the policy rate to get inflation back to two per cent,” Macklem said in August.

Speaking in Bangkok over the weekend, Macklem said, “The question we’re going to be asking ourselves is, is inflation likely to come back down towards our target on its own, or are we going to have to raise interest rates to influence the path?”

It was those comments that led some economists to change their own outlooks for interest rates in Canada, expecting the Bank of Canada to raise rates next week to get ahead of rising inflation.

“That is really what flipped the script for us a little bit and put us in the camp of expecting a Bank of Canada rate hike in October,” said Randall Bartlett, deputy chief economist at Desjardins.

“The Bank of Canada is really trying to get ahead of higher inflation, higher underlying inflation, which we haven’t materially seen yet, but to prevent it from happening.”

After the pandemic, when inflation peaked at over eight per cent, some economists felt the central bank waited too long to raise rates to get inflation under control. At the time, the key policy rate was raised relatively quickly and aggressively from emergency lows of 0.25 per cent in March 2022 to five per cent by July 2023.

“Policy was left far too low for far too long and the consequence of that was it had to raise rates aggressively over a really short period of time to get inflation back under control,” says senior economist Robert Kavcic at BMO Capital Markets.

“And so now they’re kind of sitting here perhaps looking at that mistake and saying, well, let’s not repeat that again.”

Kavcic added: “we’re looking for a very cautious set of rate hikes.”

Holt says the central bank may take a different approach this time by acting pre-emptively rather than responsively.

“Governor Macklem sounds like he’s fading backward looking data in favour of a higher forward-looking inflation forecast and higher inflation risk. The BoC looks at trends, not spot data anyway,” said Holt.

“BoC staffers have a serial addiction to missing inflection points on inflation risk and routinely underestimating it.”

All three economists expect the Bank of Canada to hike by 0.25 per cent next week, and with Bartlett forecasting another 0.25 per cent hike in January.