Bank of Canada now expected to hike key rate as it faces 'pivotal decision' - CTV News

The Bank of Canada is expected to decide whether to raise its policy interest rate this week. The decision matters because the rate influences borrowing conditions across the economy and helps shape future inflation. The bank has held the rate at 2.25 per cent for seven straight meetings.

Financial markets assigned nearly 78 per cent odds to a hike by Friday afternoon. RBC economists shifted toward expecting a quarter-point increase, citing a pivotal decision and changing economic conditions. Governor Tiff Macklem recently warned that persistently high global energy prices would worsen Canada’s inflation outlook.

The decision is not certain. RBC economists said they had very low conviction about an immediate increase. They saw a significant chance that the bank would instead use this meeting to prepare markets for a hike in December or January. The choice balances rising inflation against a labour market that lost 68,000 positions in September.

The Bank of Canada’s policy interest rate is the central bank’s main benchmark for influencing financial conditions. It does not directly set every mortgage, loan, or business rate. Instead, changes in the policy rate affect the broader cost of money, helping the bank influence demand and inflation.

When the policy rate rises, banks typically face higher funding costs and pass some of that increase to borrowers. Households may pay more on variable-rate mortgages, lines of credit, or new loans. Businesses can also face higher financing costs, making some expansions, purchases, or hiring plans less attractive.

The article reports that the Bank of Canada has kept its policy rate at 2.25 per cent for seven meetings. A hike would therefore tighten conditions compared with the recent period. Its purpose would be to help contain inflation pressures, especially as higher energy prices threaten to lift inflation further.

The expected increase is 0.25 percentage points, also called a quarter-point hike. If the Bank of Canada made that move, its policy rate would rise from the current 2.25 per cent to 2.50 per cent. The size matters because even a modest change can affect borrowing costs across households and businesses.

RBC economists said they now expect a quarter-point increase. Their shift followed recent comments from Governor Tiff Macklem about the inflation risks from persistently high global energy prices. Those comments suggested the central bank was increasingly concerned that higher oil prices could create broader inflation pressure.

The forecast remains uncertain. RBC described its conviction as very low and saw a significant chance of no immediate move. Instead, the bank could use the meeting to prepare for a hike in December or January. Markets nevertheless placed the probability of a hike near 78 per cent on Friday afternoon.

Higher energy prices can lift inflation because gasoline is a direct expense for households and businesses. When fuel costs rise, people pay more to drive, while companies may pay more to transport goods, operate equipment, or provide services. These higher costs can feed into prices measured across the economy.

The article links the increase to the war in the Middle East, which continued to drive up gasoline prices. Statistics Canada reported that annual inflation rose to 3.1 per cent in September. Governor Tiff Macklem also warned that persistently high global energy prices would raise the inflation outlook at home.

The key concern is that energy may not remain an isolated price increase. Higher operating and transport costs can create broader pressure, while businesses may pass some expenses to customers. That is why the Bank of Canada is weighing an interest-rate hike, even though the labour market weakened and the economy lost 68,000 positions in September.

A weak labour market does not automatically eliminate inflation risks. The Bank of Canada must consider both sides of the economy: slowing employment can signal weaker demand, while rising energy prices can push costs and consumer prices higher. Its decision depends on which risk appears more threatening to future inflation.

In September, Canada lost 68,000 positions, and Statistics Canada’s jobs data showed the labour market had stalled for a second consecutive month. At the same time, annual inflation rose to 3.1 per cent. Governor Tiff Macklem warned that persistently high global energy prices could worsen the inflation outlook.

A rate increase could therefore be intended to prevent energy-driven price increases from spreading more widely. RBC economists said the bank might hike now, but they had very low conviction. They also saw a significant chance of waiting and setting up an increase in December or January, giving policymakers more time to assess the competing signals.

Raising the policy rate would tighten financial conditions. Households could face higher costs on variable-rate borrowing and new loans, leaving less money for other purchases. Businesses could also pay more to finance operations or investment. These effects can slow demand, which may help reduce inflation over time.

The potential trade-off is clear in the article. Inflation reached 3.1 per cent in September, while higher energy prices threatened further pressure. A rate hike could limit how strongly those pressures spread through the economy. However, Canada had already lost 68,000 jobs, and the labour market had stalled for a second month.

If borrowing becomes more expensive, households and companies may cut spending, investment, or hiring. That could weaken economic growth and the labour market. The Bank must therefore balance inflation risks against economic weakness. RBC said it might raise rates now, but also saw a significant chance of waiting until December or January.

Central-bank rates influence inflation by changing the cost of borrowing throughout the economy. Higher rates can discourage households from taking loans and businesses from financing expansion. With less borrowing and spending, overall demand may cool. That can reduce pressure on companies to raise prices when customers are buying less.

The mechanism spreads through several channels. Households with higher loan costs may cut purchases, while businesses may delay investment or hiring. Slower demand can reduce competition for workers and ease wage pressure over time. Lower business costs and weaker pricing power can then help inflation moderate, although energy prices can push in the opposite direction.

The article shows this tension in Canada. Inflation reached 3.1 per cent as gasoline prices rose, while the economy lost 68,000 jobs in September. The Bank of Canada must judge whether further tightening is needed to contain energy-driven inflation or whether weaker employment argues for waiting until December or January.