Monday 26 October 2026

The Bank of Canada raises its overnight rate by 25 basis points to 2.50% on Wednesday, to protect inflation expectations rather than because core prices are running hot. A second hike before March is less certain than markets price.

Why we think so. Headline inflation is almost entirely an energy story. September CPI rose to 3.1% from 3.0%, with gasoline up 27.8% on the year and energy as a whole up 19.0%. Strip out gasoline and inflation was 2.2%; the Bank’s core measures eased, CPI-trim to 1.8% and CPI-median to 1.9%. On those numbers alone there is no case for tightening; the case rests on time. The Bank has said its concern grows the longer energy prices stay high, because a prolonged shock risks feeding into expectations, wages and the prices of everything else. With Brent still above US$114 after a 6% gain last week, that risk has grown, and Governor Tiff Macklem said at the IMF meetings that the Bank was ready to act if inflation stayed high. A hike now is a signal that a temporary shock will not be allowed to become a permanent one.

What the market is pricing. Money markets price a 25 basis point increase, and 19 of 34 economists in a Reuters survey expected it, with a majority seeing one more before March. The 2-year yield, at 3.33% on Friday, is more than 22 basis points above its level at the September meeting. We agree on Wednesday and differ on the follow-up. The last two jobs reports erased this year’s employment gains, and housing, manufacturing and wholesale data point to a third quarter well below the second. Once the signal has been sent, those conditions argue for patience. BMO’s Doug Porter reads the messaging as pointing to a hike he would not favour, and Pedro Antunes of Signal49 Research expects the Bank to talk tough: a message, not the start of a long cycle.

What it means. If the overnight rate rises, the big banks’ prime rate follows within a day or two, and every variable-rate mortgage, home equity line of credit and floating business loan reprices with it. On a $500,000 variable mortgage in the low-4% range with 25 years left, a quarter point adds about $68 a month and a half point about $137. Fixed rates key off the 5-year 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 at 3.56% is higher than at any point since the summer, so renewers face higher costs whichever way they lean; a written rate hold for a renewal in the next six months costs nothing. For savers, the same move lifts what savings accounts and GICs pay.

What would change our mind. A hold on Wednesday with language that the Bank will look through energy, which would pull the 2-year yield back under 3.20% within days. Or core measures climbing above 2.5% over the winter, which would mean the energy shock is spreading and more than one hike is coming.

What to watch. The Bank of Canada decision and Monetary Policy Report on Wednesday 28 October at 06:45 PT; the U.S. Federal Reserve decision at 11:00 PT the same day, expected to hold at 3.75% to 4.00%; and Canada’s August GDP on Friday, where Statistics Canada’s advance estimate was 0.1%.

The bar for this week’s earnings is high enough that good numbers may not be rewarded, and the real risk lies in capital spending guidance rather than profits. We expect the Federal Reserve to hold on Wednesday and leave December open.

Why we think so. Expectations are already demanding. About one third of S&P 500 companies report this week, and third-quarter earnings are on pace to rise more than 32% from a year ago on LSEG IBES data. The more sensitive number is spending. The large cloud companies are expected to spend about US$800 billion on capital projects this year, and investors have started to ask when that pays back. Thursday showed what happens when the answer disappoints: the Nasdaq posted its biggest one-day drop since June after Meta’s report disappointed on spending, even though the company beat on earnings. Alphabet and Microsoft report on Wednesday and Amazon on Thursday, so the market hears from the biggest spenders within two days. On the Fed, the September hike was its first since 2023, and futures put the chance of another this week at about 5% against near 80% for December. With consumer sentiment at 48.0, the second-lowest reading on record, and one-year inflation expectations at 4.7%, the committee has reasons both to wait and to keep a hike in view.

What the market is pricing. We agree with futures on Wednesday: a hold at a target range of 3.75% to 4.00%, with the interest in Chair Kevin Warsh’s press conference and whether December stays open. On equities, the S&P 500 is up about 12% in 2026, which leaves room for disappointment. The first estimate of U.S. third-quarter GDP, with a consensus of 3.1% annualized against 2.2% in the second quarter, will show whether growth is strong enough to justify the Fed’s worry about inflation.

What it means. Most Canadians who hold a U.S. index fund in an RRSP or TFSA now hold a large slice of the same ten companies, so this week’s results move retirement accounts whether or not you follow the names. Look up how much of your portfolio sits in the ten largest U.S. stocks and compare it with what you would choose deliberately; if the answer surprises you, rebalance to your target rather than react to an earnings day. A portfolio that funds a retirement starting within five years should not depend on one sector’s spending plans. For borrowers and bond investors, a U.S. central bank hiking with inflation expectations near 5% keeps long bond yields high on both sides of the border, which sets Canadian fixed mortgage rates and makes a U.S. bond fund bumpier than its label suggests.

What would change our mind. Microsoft and Alphabet raising their spending plans and seeing their shares rise anyway, which would mean the market still has appetite for the AI build-out. A Fed hike this week would also mean we have misread how worried the committee is.

What to watch. Tuesday’s Conference Board consumer confidence reading, with a consensus of 80.0; Alphabet and Microsoft results and the Federal Reserve decision on Wednesday at 11:00 PT, with the press conference at 11:30 PT; and Amazon on Thursday alongside U.S. third-quarter GDP and September PCE inflation.

B.C.’s new tax measures will arrive in a spring budget rather than before the new year, and parts of the fiscal plan are likely to slip. For households, whether tax brackets are re-indexed matters more than whether the $1,000 figure survives intact.

Why we think so. The Conservatives won clearly, leading in 63 seats to the NDP’s 28 and the Greens’ 2 in the unofficial count, against 47 needed for a majority. But the transition takes time. The final count runs 6 to 10 November, recounts are possible where margins are 100 votes or fewer, and David Eby stays as premier through the count. A new government needs a budget, usually in February, before any promise changes what comes off a paycheque. The fiscal plan also rests on optimistic ground. The platform aims to bring the expected $14-billion deficit down to $10.8 billion over three years, on growth assumptions that include 3.2% in 2029, well above the province’s own forecast, while promising a $1,000 tax cut for nearly every worker, expanded $10-a-day childcare and 500 more RCMP officers over five years. The Canadian Press put the projected deficit at $13.8 billion in September. When revenue assumptions are generous and commitments are firm, something usually gives, and timing is the most common casualty.

The bigger picture. Bracket indexation is less visible than a tax cut but often matters more. When brackets are frozen, as the NDP did through 2030, pay rises push more income into higher brackets each year, raising tax without any change in rates. Re-indexing protects every earner as pay rises, while a flat-dollar cut stays the same size. The NDP also raised the lowest provincial rate to 5.6% from 5.06% and proposed, then delayed, extending the 7% PST to professional services such as accounting. Its proposed tax on unsold condominiums and higher speculation tax are now unlikely to proceed.

What it means. If you live or run a business in B.C., provincial income tax, PST on services and the speculation and vacancy tax are all open questions, but none of the changes is law yet. Changing tax withholding, instalments or incorporation plans on the strength of a platform would be premature; the legislation is what counts. Business owners who put off billing changes for the PST extension can leave those plans on hold. For families, provincial rate changes alter the after-tax value of RRSP contributions and the benefit of income splitting, so a plan reviewed before the budget should be revisited once the rates are known.

What would change our mind. A throne speech or fall update that legislates the tax cut effective 1 January 2027, or a credit-rating warning that forces the new government to drop the cut rather than delay it.

What to watch. The Wednesday 28 October deadline for recount requests where margins are 100 votes or fewer, including Ladysmith-Oceanside at 13 votes; the final count from 6 to 10 November; and the new government’s first budget, usually in February.