Traders, economists boost bets on Canada rate hike next week

More economists and traders expect the Bank of Canada to hike interest rates next week after the central bank’s latest surveys showed inflation expectations rising.

The Bank of Montreal, Royal Bank of Canada and Desjardins Group flipped their calls on Monday, saying that officials led by Governor Tiff Macklem are likely to raise the benchmark rate to 2.5 per cent at the Oct. 28 meeting. RBC’s securities unit also said it’s expecting a hike.

Earlier Monday, Statistics Canada reported that inflation accelerated to a 3.1 per cent yearly pace, below expectations in a Bloomberg survey. Markets shrugged off the release and bonds sold off across the curve. As of late afternoon in Ottawa, traders in overnight swaps put the odds of a hike at 80 per cent, up from nearly 70 per cent earlier in the day and around 30 per cent a week ago.

“Despite this morning’s milder-than-expected CPI report, inflation risks remain tilted to the upside given the trade war and still-elevated energy prices, with no end in sight to either shock,” Shelly Kaushik, an economist with the Bank of Montreal, wrote in a report to investors.

The central bank also released its business and consumer outlook surveys Monday, which found that households’ longer-term inflation expectations are rising. Roughly half of firms said they plan to pass along some or all of their cost increases from higher energy prices and tariffs to customers.

“Central bankers can no longer look through the inflationary impact of high energy prices,” said Royce Mendes, head of macro strategy at Desjardins Group.

“Businesses have faced elevated input costs for long enough that we now believe more broad-based consumer price increases are imminent. Consumers’ longer-term inflation expectations have also risen to levels not seen since the worst of the COVID-era price hikes, reinforcing the need for action,” he said.

Bank of Nova Scotia firmed up its call for a rate hike after Monday’s data release, and Manulife is still forecasting back-to-back increases, this month and in December.

“If a hike is significantly priced, then they’re likely to deliver one since easing financial conditions by whiffing would be tough to justify,” said Derek Holt, head of capital markets economics at Scotiabank.

Despite growing bets on a hike, the consensus in a recent Bloomberg survey points to a hold next week.

The Bank of Canada has warned that it may need to increase borrowing costs if energy prices remain elevated and policymakers see further evidence of inflation pressures spreading from the gas pump to other goods and services.

In a call with reporters on Saturday, Macklem said there was “no resolution in sight for the conflict in the Middle East,” adding that higher energy prices from the conflict are also boosting exports, incomes, government revenues and investment.