Tuesday 20 October 2026

The Bank of Canada holds its overnight rate at 2.25% on 28 October, with notably firm language. Rising inflation expectations are a warning the Bank will name, not yet a trigger it will act on.

Why we think so. The surveys pull in two directions, and the Bank has to weigh both. On one side, long-term consumer inflation expectations have risen to match elevated short-term ones, and roughly half of firms plan to pass on some or all of their cost increases. That is exactly the channel through which an energy shock becomes general inflation. On the other side, the inflation the Bank can influence is not running hot. September CPI came in at 3.1%, but gasoline was up 27.8% on the year and 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. was 2.2%. Core measures sit near 2%, employment has fallen for two months and hiring intentions remain below their historical average. Raising rates into a softening labour market to counter a price shock that starts with a war abroad would deepen the slowdown without lowering the price of fuel. Holding, with a clear warning, is the more natural response. Timing also argues for caution: about three quarters of the survey answers came in before Canada-U.S. trade talks broke down on 21 August, so the surveys may understate the strain firms have felt since.

What the market is pricing. Going into Monday’s data, LSEG pricing put the odds of a quarter-point hike on 28 October at about 34%. We would place it similarly: a real possibility, but the minority outcome. Where we differ from the hawkish reading is on what rising expectations require. A central bank can lean against expectations with words first, signalling that it is prepared to move, and keep the increase itself in reserve. We expect the Bank to use that tool before the other.

What it means. For variable-rate borrowers and anyone with a line of credit, the next move in rates is more likely up than down, even if it does not come this month. Prime follows the policy rate, so a budget that only works at today’s rate is fragile; running it at a rate 0.5% higher is a sensible test. For fixed-rate borrowers nearing renewal, the risk runs through bond yields, which react to the Bank’s tone as much as to its decisions. For savers, GIC and high-interest savings rates may hold up longer than a slowing jobs market would normally suggest. The common thread is a cash-flow plan that tests how a rate rise, a job interruption or both at once would change the picture, before either happens.

What would change our mind. A 25 basis point hike on 28 October, or Bank language describing inflation expectations as unanchored. Either would tell us the Bank weighs the surveys more heavily than two months of job losses, and that a first increase is arriving sooner than markets price.

What to watch. The Bank of Canada decision on 28 October is the main event; no Canadian data releases are scheduled today. U.S. housing starts, building permits and pending home sales for September give a read on the economy south of the border, and the weekly API oil inventory figures feed into the energy prices driving Canadian headline inflation.

This earnings season is a test that equities can fail even with good results. With S&P 500 profits expected to grow about 29% this quarter and the U.S. 10-year yield above 5%, we expect the market to keep punishing anything short of strong through this week’s big reports.

Why we think so. Two forces are pressing on valuations at once. The first is expectations. When analysts already expect profit growth of about 29%, a company has to beat that to be rewarded, and merely meeting it can read as a disappointment. Last week showed this, with the S&P 500 suffering its worst week since June before Monday’s rebound in technology shares. The second is the price of money. The U.S. 10-year Treasury bond yieldBond yield The annual return an investor gets for lending to a government or company through a bond. Yields rise when bond prices fall. Fixed mortgage rates are priced from the 5-year Government of Canada yield. climbed to 5.14% from 5.09% on Monday, having touched 5.30% earlier this month, its highest since 2002. That yield is the reference rate the rest of the world prices off, and it competes directly with equities for savings. When a government bond pays above 5%, investors demand more from stocks to justify the extra risk, which pulls valuations down unless profits rise fast enough to offset it. Monday itself was mixed: the S&P 500 rose 0.4% to 7,690.73 and the Nasdaq 1.1%, while the S&P/TSX composite fell 247.92 points to 35,928.63 on broad losses.

What the market is pricing. The market is priced for very strong profits and reacts sharply to any gap. We agree the bar is high, and we think demanding expectations combined with 5% bond yields leave little room for error. Canadian yields were steadier, with the Government of Canada 2-year at 3.21%, the 5-year at 3.54% and the 10-year at 3.84% on 16 October. That gap helps explain why Canadian borrowing costs have not risen as sharply, although high U.S. long-term yields tend to pull Canadian long rates up over time.

What it means. For Canadian investors, two points stand out. The first is currency. The loonie closed at 70.94 cents US, up from 70.65 on Friday, and a rising loonie quietly trims the value of U.S. holdings in Canadian dollar terms. If most of your equity sits in U.S. dollars, a stronger loonie is a drag no stock selection fixes, which is worth remembering before judging a portfolio by index headlines. The second is the role of bonds. With yields this high, bonds and bond funds offer a real income alternative to equities, so the fixed income side of a balanced portfolio is now paid to wait. For borrowers, high U.S. long-term yields keep pressure on longer-term borrowing costs even where central banks are not moving. The planning question is asset mix, including how much is held in Canadian versus foreign currency, which deserves a review when both bond yields and the loonie are moving.

What would change our mind. Broad-based earnings beats this week alongside calm bond yields. That would show equities can absorb 5% rates without repricing, and that our caution is misplaced.

What to watch. Netflix reports after the close today, and Tesla, Meta and IBM report on Wednesday. The U.S. 10-year yield, now 5.14%, is the other number to follow: a move back toward this month’s 5.30% high would add to the pressure on valuations.

Over the next six months, fixed mortgage rates have more room to fall than variable rates. For anyone renewing before year end, a rate hold taken now, with the option to take a lower rate at closing, costs nothing and protects against a surprise on 28 October.

Why we think so. The two kinds of mortgage rate answer to different forces. Variable rates follow prime, which moves with the Bank of Canada’s overnight rate, and the Bank has held at 2.25% for close to a year with its next move more likely up than down. Fixed rates are priced off the 5-year Government of Canada bond yieldBond yield The annual return an investor gets for lending to a government or company through a bond. Yields rise when bond prices fall. Fixed mortgage rates are priced from the 5-year Government of Canada yield., which closed at 3.54% on 16 October, about 0.15% below its late-September high of 3.69%. Bond yields have eased while the policy rate has not, and lenders tend to reprice fixed products as their own funding costs fall. That gives fixed rates room to drift lower, while variable rates have no obvious path down until the Bank changes direction. That asymmetry is the heart of the call.

How this has played out before. Bond markets move ahead of central banks. They react to every data release and every change in tone, while the policy rate changes only at scheduled decisions. That is why fixed rates can fall in the months before a central bank acts, or rise ahead of a hike. It is also why a rate hold is valuable in an uncertain period: it fixes the rate you can be offered for a set time, while leaving room to take a lower one if yields keep easing before closing. A hold works like an option, and in this market it costs the borrower nothing.

What it means. For borrowers renewing this year and next, the renewal letter is an opening offer, not a final one. Brokers suggest starting about four months before the renewal date, earlier if you are self-employed or your income has changed. The sums are real: on a $500,000 mortgage with 20 years left, a five-year fixed rate of 4.5% instead of 4.79% saves about $4,629 in payments over the term. Switching between federally regulated lenders at renewal, without increasing the loan or the amortization, generally avoids a fresh stress test and an early-break penalty, though appraisal, legal and discharge fees may apply and can decide whether switching pays. Rate is not the only term that matters: prepayment room, portability and payment flexibility can be worth more than a few basis points. If your renewal falls within the next 120 days, a written competing quote in front of your current lender is the strongest negotiating tool. A renewal is also a natural moment to revisit amortization, prepayment and whether the mortgage still fits the household’s income.

What would change our mind. A Bank of Canada hike that pushes the 5-year yield back above 3.8%. That would reverse the recent easing in bond yields and remove the room for fixed rates to fall.

What to watch. The Bank of Canada decision on 28 October, and the 5-year Government of Canada yield, last at 3.54%, as the most direct guide to where fixed mortgage pricing goes next.