Thursday 29 October 2026

Wednesday’s hike to 2.50% is the first of two, not one and done. We expect a second quarter point in December or January, and a policy rate of 2.75% to 3.00% is the range we would plan around into 2027, not the start of a long sequence.

Why we think so. The reasoning is in the Bank’s own forecast. The Monetary Policy Report expects CPI inflation to reach about 3.5% by the end of the year and to average 3% in 2027, a full percentage point above July’s projection, before easing to 2% only in mid-2028. Governor Macklem said that even after the increase the rate “is still low enough that it’s not restraining growth,” and the statement says there “could be a need to increase the policy rate further.” A committee that describes its own policy as not yet restrictive, while forecasting inflation above 3% for more than a year, has left itself room to move again. At the same time, the case for a long series of hikes is weak. Inflation excluding gasoline was 2.2% in September, core measures remain close to 2%, unemployment has been around 6.5% for several months, and the Bank expects growth to slow in the fourth quarter as new U.S. tariffs bite. That points to one more step, possibly two, and then a pause.

What the market is pricing. Markets priced a 43% chance of another quarter point at the 9 December decision as of Wednesday afternoon, so they see a second move as close to even rather than likely. Our call is slightly firmer on a second hike but open on timing. Among economists, RBC’s Frances Donald expects a move in December or January and three more in total, while Servus Credit Union’s Charles St-Arnaud expects back-to-back hikes to 2.75% by year end. We sit between them: a second hike yes, a third only if inflation outside energy picks up.

What it means. Variable-rate mortgages and lines of credit got more expensive today, as the six largest banks moved prime to 4.70%. On MoneySense’s example of a $618,480 mortgage over 25 years, the payment rises by about $82 a month. Borrowers with a variable mortgage on fixed payments will see no change in the amount, but more of each payment now goes to interest; it is worth asking the lender for the current amortization and trigger rate. Fixed rates are priced off the five-year yield, which at 3.57% had already absorbed the hike, so renewal quotes should look much as they did last week, with Ratehub’s best five-year fixed at 4.34%. Planning a cash buffer for 2.75% rather than 2.50% is prudent. Savers should see high-interest savings and short GIC rates follow prime upward within weeks, though with inflation projected at 3% through 2027 the real return on cash stays thin.

What would change our mind. October CPI in mid-November showing inflation excluding gasoline below 2%, together with a weak October jobs report, would make a December hold the base case. A December hike with guidance pointing to several more would mean we underestimated the Bank’s resolve.

What to watch. Statistics Canada’s August payroll employment figures today and August GDP on Friday. October CPI in mid-November and the October jobs report. The Bank’s next decision on 9 December.

The AI investment cycle has become a credit story as much as an equity story, and that is a more fragile footing. Through 2027, we think the test for these companies is the cost and availability of capital, not demand.

Why we think so. Demand is not the problem. Microsoft’s Azure grew 48% to US$33.17 billion, revenue rose 19% to US$92.3 billion, and adjusted earnings of US$4.89 a share beat the roughly US$4.72 expected. Google Cloud revenue more than doubled, up 103% to US$30.7 billion, with operating income of US$11.1 billion. The difference is in funding. Microsoft’s cash capital spending was US$39.37 billion, or US$45.2 billion including finance leases, and free cash flow fell 27% to US$18.63 billion, but it remained positive. Alphabet spent US$51.4 billion, more than double a year earlier, said 2027 spending would “increase significantly,” and ran free cash flow of negative US$9.1 billion. To pay for it, Alphabet raised US$28.7 billion from senior notes and US$12.4 billion from selling stock, taking long-term debt to US$125.1 billion from US$46.5 billion at the end of 2025. When a company with Alphabet’s cash generation borrows and issues shares to build, the next constraint is what that money costs, and the 10-year Treasury is above 5%.

What the market is pricing. The verdict was split: Microsoft shares rose after hours and Alphabet’s fell sharply. Markets are no longer rewarding AI spending as such; they are separating companies that fund it from cash flow from those that borrow and dilute to do it. The enthusiasm has not gone, as Oracle up 11%, SK Hynix 13% and Vertiv 16% on the day showed, but it is now conditional on financing.

What it means. These two companies are among the largest holdings in funds that track the S&P 500 or global indexes, so Wednesday night happened inside many RRSPs and TFSAs. The question for a Canadian investor is not which company is right, but how much of a portfolio’s return now depends on the AI build-out continuing at this pace, and what happens if spending slows or the debt that funds it becomes more expensive. A simple test is to add up the five largest holdings in each equity fund. If they exceed a quarter of the fund, that concentration is a decision already made, and better made on purpose. Holding many funds that own the same few companies can look diversified without being so.

What would change our mind. If cloud backlogs and margins keep rising through 2027 while corporate bond spreads stay tight, this borrowing will look like cheap growth and our caution will look misplaced.

What to watch. Amazon’s quarterly results after today’s close, the third large AI spender to report this week. This morning’s U.S. GDP and PCE inflation figures, which will move the 10-year yield and with it the cost of funding the build-out.

Christine Lagarde’s departure changes nothing before February, and we expect today’s ECB hold at 2.5% to come with firm language, much as the Fed’s did. For Canadians, that means rate relief is unlikely anywhere in the first half of 2027.

Why we think so. All three central banks this week face the same problem. The Bank of Canada’s statement set the backdrop: reduced oil supply from the Middle East and strained refining capacity are pushing up inflation globally, while world growth is still seen at 3.1% in 2026 and 3.2% in 2027 and 2028. Energy inflation above target with growth good enough to tolerate higher rates is a reason to hold or hike, not to ease. None of the three has the kind of labour-market weakness that would justify cutting. The leadership change does not alter that in the near term. Lagarde steps down on 7 February 2027, about nine months early; the European Council appoints her successor by qualified majority on a recommendation from EU finance ministers, after consulting the European Parliament and the ECB’s Governing Council. No candidates have been named, and policy until February will be made by the same council that made it last month.

The bigger picture. When several major central banks lean the same way, no single one has much room to diverge. The Bank of Canada hiked, the Fed held with two votes for a hike, and the ECB is expected to hold. That pattern means Canada is not an outlier, and the Bank of Canada has little scope to move toward cuts while its peers lean the other way, because doing so would weaken the dollar and import more inflation. A leadership change at the ECB adds a source of uncertainty for 2027 about how Europe would respond if the energy shock persists.

What it means. Plans that depend on lower borrowing costs in the first half of 2027, whether a mortgage renewal, a business expansion or a home purchase, should not be built around them. Most Canadians own Europe through a global or international equity fund, and some have euro pensions, property or tuition. The Canadian dollar has risen against the euro from about 0.6225 in mid-September to 0.6395 on Wednesday, roughly 2.7%, which helps anyone with euro spending ahead and slightly lowers the Canadian-dollar value of European holdings. For known euro expenses over the next year, converting in stages rather than all at once avoids letting one week’s rate decide the whole bill. It is also worth checking whether unhedged foreign currency in a retirement portfolio matches the household’s actual future spending in those currencies.

What would change our mind. An ECB cut, or a signal of an easing bias today, would prove us wrong. So would a successor process that produces a candidate who openly favours looking through energy inflation.

What to watch. The ECB’s decision at 06:15 PT today and Lagarde’s press conference at 06:45 PT. Progress in the successor process, which Costa says will proceed without delay, ahead of her departure on 7 February 2027.