Wednesday 28 October 2026

The Bank of Canada raises the overnight rate by 25 basis points to 2.50% this morning, and frames the move as insurance against energy-driven inflation spreading, not as the start of a sequence. The number to read first is the Monetary Policy Report’s inflation projection for 2027.

Why we think so. The Bank faces two pressures that point in opposite directions, and a single hike with cautious language is the way to reconcile them. On one side, headline inflation was 3.1% in September, above the 1% to 3% band, driven almost entirely by energy, with gasoline up 27.8% from a year earlier, and the Bank’s own surveys show inflation expectations rising. Expectations are the one thing a central bank cannot let drift, because once households and businesses expect higher prices, they set wages and prices accordingly. On the other side, the economy lost 68,000 jobs in September, unemployment rose to 6.5%, CPI ex-gasolineCPI ex-gasoline The Consumer Price Index with gasoline removed. When it sits well below the headline rate, the inflation is coming from fuel rather than from the broad economy. ran at 2.2% and the Bank’s core measures eased below 2%. Those numbers do not support a series of hikes. In July the Bank projected inflation of 2.5% for 2026 and 2.0% for 2027, and Governor Macklem has said substantial revisions are coming. A sharply higher path justifies acting today; the weak job market argues for stopping soon.

What the market is pricing. Money markets price roughly a 77% chance of a 25 basis point increase, and 19 of 34 economists in the Reuters poll expected that move, with a majority also expecting one more by March. National Bank’s Taylor Schleich and Ethan Currie say the evidence leans toward a hike, while RBC still expects a hold through year end. We agree with the market on the move but differ on the follow-through: we expect the statement to avoid committing to a second increase. Bond yields barely moved into the decision, with the five-year at 3.57%.

What it means. For anyone with a variable-rate mortgage or a home equity line of credit, a hike moves the lender’s prime rate within a day or two, and the payment or the amortization moves with it. MoneySense puts the lowest five-year variable at 3.43% today and near 3.7% after a quarter point; on its example of a $618,480 mortgage over 25 years that is roughly $80 a month more. Fixed-rate borrowers are priced off the five-year yield, which already assumes the hike, so renewal quotes should not change much on the decision itself. A household or business that knows how much of its debt floats with prime, and whether its cash buffer covers two hikes rather than one, is well placed for either outcome. Savers should see high-interest savings and short GIC rates edge up within weeks.

What would change our mind. A hold this morning, or a hike with a statement that explicitly points to further increases, would show we have misread the Bank’s balance between inflation expectations and the labour market.

What to watch. The decision and Monetary Policy Report at 06:45 PT, and the press conference with Governor Macklem and Senior Deputy Governor Rogers at 07:30 PT. In the report, the 2027 inflation projection and any change to the growth outlook.

The oil market is pricing a standoff with a tail risk of war, and we expect that to hold Brent between US$105 and US$120 a barrel until the U.S. midterms on 3 November. Talks in Tehran lower the chance of the worst outcome, but they do not reopen shipping lanes or stop the Houthis.

Why we think so. The news this week has pulled prices both ways, and neither side has won. Brent fell almost US$2 on Tuesday on hopes for the talks that Saudi Arabia, Turkey and Pakistan held with Iranian officials in Tehran, then climbed back to US$114.67 on Wednesday after Houthi forces claimed a ballistic missile strike on the 550,000 barrel a day Ras Tanura refinery. Saudi authorities did not confirm a direct hit and reported a fire nearby contained, but Saudi Arabia also intercepted missiles and drones aimed at the Eastern Province, the south and Riyadh. Earlier attacks targeted pumping stations on the East-West pipeline, the route that lets Saudi crude bypass the Strait of Hormuz, which means the workaround for one chokepoint is itself under fire. The Wall Street Journal reports that Washington has warned Gulf governments to prepare for a short, intense campaign against Iran after the midterms. And the American Petroleum Institute reported a 2.03 million barrel draw in U.S. crude stocks against an expected build. Each of those keeps a floor under prices.

What the market is pricing. Brent reached six-month highs above US$117 last week, and West Texas Intermediate is around US$101. ING says the market is pricing a greater chance of re-escalation and expects little clarity before 3 November. Our range agrees: the top reflects the risk of escalation, the bottom the hope from diplomacy.

What it means. Oil near US$115 is the reason Canadian inflation is 3.1%, and the reason the Bank of Canada is weighing a hike this morning into a weak job market. It reaches households through gasoline, airfares, heating and delivered goods, and businesses through freight surcharges. For an Alberta or Saskatchewan employer this is a windfall quarter; for a trucking, farming or restaurant business elsewhere it is a cost that cannot be passed on in full. Businesses with a meaningful fuel line can ask suppliers now how surcharge formulas reset and price contracts that run past November with a fuel clause rather than a fixed figure. Investors may find that energy exposure in a Canadian index fund has grown this year by accident rather than by choice.

What would change our mind. A verified ceasefire that includes the Houthis could take US$10 to US$15 off Brent quickly. A confirmed hit on Saudi export terminals would do the opposite.

What to watch. The U.S. EIA weekly petroleum report at 07:30 PT, to see whether it confirms the API draw. The Bank of Canada’s decision this morning, for how it treats energy prices. The U.S. midterms on 3 November.

October’s jump in U.S. consumer confidence is a gasoline bounce, not a turn. Into the November reading, we expect the stated pullback in spending plans to matter more for Canadian exporters than the headline.

Why we think so. The rise was large and unexpected. The Conference Board index rose to 91.7 from an upwardly revised 84.2, against a consensus for a dip to 80.4; the Present Situation index rose to 120.4 from 111.8 and the Expectations index to 72.6 from 65.7. But the Conference Board’s own economist, Fergus McCormick, tied the rebound to retail gasoline prices easing from September to October, and said confidence remains on the downward trend of the past few years. More important, consumers planned less spending on services and durable goods over the next six months, because higher price levels have eroded their purchasing power. Expectations remain far below the Present Situation reading. A mood that rises with a single price, while intentions to spend fall, is not a durable recovery. The University of Michigan index tells a quieter story, revised up to 48.0 from 46.3 but below 48.1 in September.

The bigger picture. Confidence surveys respond quickly to prices people see every day, and gasoline is the most visible of them. That makes them a good gauge of mood and a weaker gauge of spending. The same mechanism likely applies in Canada, which is why the Bank of Canada focuses on whether energy inflation spreads to everything else rather than on how households feel in a given month.

What it means. Roughly three-quarters of Canada’s exports go to the United States, so the American consumer’s mood is a Canadian business indicator. A confident consumer who plans to spend less on durable goods is a mixed signal for Ontario auto and parts makers and for anyone selling into U.S. retail. Business owners who export can look at their order book for durable and discretionary goods separately from the rest, because that is where American households say they will cut, and test whether the next two quarters of revenue depend on U.S. demand holding. Investors in consumer-facing companies should weigh stated spending plans more heavily than the confidence headline.

What would change our mind. If the November reading holds above 90 with oil still above US$100, the improvement would be more than gasoline, and we would revise our view.

What to watch. The November Conference Board reading. Oil prices, which drive the gasoline effect. The Fed’s decision at 11:00 PT today, for how it reads U.S. demand.