Markets are pricing an 80% chance that the Bank of Canada will lift the overnight rate by 25 basis points to 2.50% on Wednesday, 28 October, which would be its first increase in a year after holding at 2.25% following an October 2025 cut. A Reuters poll shows a majority of economists expect a hike, and many look for one further increase by end-March, a shift from earlier expectations for no change through end-2026. The decision is due at 13:45 GMT, with Governor Tiff Macklem speaking at 14:30 GMT, as traders scrutinise updated forecasts after signals that the Monetary Policy Report could revise inflation projections higher. Business and consumer surveys point to rising inflation expectations, strengthening the focus on guidance beyond this meeting.
Oil-driven inflation remains central: Brent briefly rose above $117 a barrel this month, while September inflation accelerated to 3.1%, above the 1%–3% target band, even as underlying pressures are described as more contained. Growth has been resilient, with second-quarter GDP at 3.3%, retail sales up 1.2% in August and a preliminary 0.7% gain for September, alongside roughly 2% GDP growth indicated for the third quarter; however, employment fell by 68,300 in September and wage growth slowed to about 2.3% year-on-year from 3.3% a year earlier. Markets will also watch US-Canada yield spreads and USDCAD levels, with scenarios ranging from a move below 1.4000 towards the 200-day SMA near 1.3880, or a rebound towards 1.4100 and the 18-month high near 1.4230.
Market Impact of Expected Rate Decision
With the Bank of Canada expected to raise its key interest rate by 25 basis points to 2.50% this Wednesday, we need to prepare for elevated volatility in currency and interest rate derivatives. Because markets have already priced in an 80% chance of this move, the rate decision itself will not be the primary market driver. Instead, we should focus on the central bank’s forward guidance and updated inflation forecasts to judge the future path of policy.
We must closely monitor energy markets, as Brent crude recently surged past $117 per barrel amid geopolitical friction and supply constraints. This energy rally helped push Canada’s September inflation rate to 3.1%, taking headline growth above the central bank’s 1% to 3% target range. Historically, persistent oil shocks have led to broader price pressures across transport and manufacturing, giving policymakers a solid reason to maintain a hawkish tone.
Economic Backdrop and Currency Scenarios
While robust second-quarter economic growth of 3.3% and steady retail spending support higher borrowing costs, we cannot ignore emerging cracks in the labor market. Canadian employment dropped by 68,300 jobs in September, while annual wage growth cooled down significantly to 2.3%. As derivative traders, we should weigh this employment slowdown against sticky energy inflation when pricing short-term interest rate instruments.
If the central bank signals another rate increase by March and revises its inflation forecasts upward, we expect Canadian bond yields to rise relative to US Treasury yields. In this hawkish scenario, we should anticipate downside pressure on USDCAD below the 1.4000 level. A clean break under that floor could push the pair toward its 200-day moving average near 1.3880 over the coming weeks.
Conversely, if officials highlight tariff risks and labor market softening, traders may treat this meeting as a temporary hike rather than a full tightening cycle. A cautious message would allow the US dollar to keep its interest rate advantage over the loonie. Under these dovish conditions, we should prepare for USDCAD to rebound toward 1.4100, with room to test its 18-month high near 1.4230.
