The Bank of Canada, gatekeeper of mortgage rates and all other things influenced by interest rates, has held its overnight rate at 2.25% for its last seven announcements, but one economics group says, as the bank approaches eight, it will open the gate.
In a new report, Oxford Economics expects the bank to raise its rate by .25% on Wednesday, with another .25% increase on Dec. 9, holding at 2.75%, which the bank considers a neutral rate.
Oxford's view of a .25% increase on Wednesday is shared by 56% of economists polled by Reuters between Oct. 21 and 23 who expect another .25% increase by the end of March.
"Oxford expects headline inflation in the mid-3% range in late 2026 and early 2027," says Canadian Mortgage Professional (CMP). "It assumes Brent crude stays above US$100 a barrel for the next six months.
Oil hit $117 a barrel on Oct. 23, Reuters reported.
Data compiled by Bloomberg found a 75% chance of a hike on Wednesday.
In a note to clients, Derek Holt, vice-president & head of capital markets economics says a hike is about 85%, however, "is a surprise hold instead of a hike possible? Yes, it has happened in the past," said Holt. "It has never happened under Governor Macklem when it has been priced as high as now."
"It would be more awkward not to hike," added Holt. "One reason is that it would ease financial conditions at an awkward juncture for inflation risks and would likely do so by driving lower borrowing costs than what is priced and a weaker Canadian dollar."
Others see less urgency, including Sherry Cooper, chief economist at Dominion Lending Centres, who last week said, "(September's) inflation report reinforces our view that higher gasoline prices temporarily boost headline inflation while further eroding household purchasing power. However, these energy-driven increases, largely tied to geopolitical tensions, are unlikely to trigger a broader resurgence in underlying inflation.”
Looking further down the road, Oxford's economists believe if oil prices remain elevated, the bank could hike the rate to the top of its neutral range at 3.25% or possibly higher.
Canadian housing markets slowed in September and a rate increase will keep activity subdued.
“We expect home sales volumes and prices to slide this fall and into early next year as mortgage rates rise,” says the Oxford report, adding all other sectors will feel the effect.
"Elevated debt will continue to constrain spending by Canadian households and make them vulnerable to job losses, higher interest rates, and a resurgence in oil prices.”
Speaking at IMF meetings in Bangkok last week, Bank of Canada Governor Tiff Maclem said, “the risk that inflation broadens and becomes more persistent has gone up.”
The bank's rate announcement will come at 7:45 am mountain time on Wednesday.
