Bank of Canada Rate Hike Looms as Oil Squeezes Prices

A Bank of Canada rate hike is the big question hanging over wallets across the country this week, and the answer lands on Wednesday morning. The central bank has kept its policy rate parked at two and a quarter per cent for almost a year, but oil prices are making that calm look shaky. If policymakers move, it would be the first increase since July of 2023, and variable-rate mortgage holders would feel it fast.

Why a Bank of Canada rate hike is suddenly on the table

Not long ago, most economists figured the bank would sit still through the end of the year. That view flipped in a matter of weeks. According to Reuters, nineteen of thirty-four economists surveyed between October twenty-first and twenty-third expect a quarter-point increase to two and a half per cent, and a majority also pencil in one more move before March.

Money markets are even more confident than the economists. Reuters reports that traders are pricing in a quarter-point hike for Wednesday, which is a huge swing from earlier this month. The push came after Governor Tiff Macklem signalled at the International Monetary Fund meetings in Bangkok that the bank is ready to act if inflation stays high.

Oil is doing the damage

The villain in this story is energy. Annual inflation rose to three point one per cent in September, up from three per cent in August, and Reuters notes the jump was driven almost entirely by fuel costs tied to the war with Iran. Diesel is trading around two dollars and seventy cents a litre, more than a dollar higher than at the start of the year, according to figures cited by Morningstar.

Diesel matters more than it sounds. It powers the trucks that move groceries, parts and packages, so a spike there can creep into everything else you buy. Tony Stillo of Oxford Economics told Morningstar that gasoline is one thing, but diesel is an intermediate input into trucking and other transport, which is where price increases can get passed along.

The case for hiking now

Supporters of a move argue it is cheap insurance. Stillo describes it as an insurance move that would bring rates back to a neutral setting rather than the start of an aggressive tightening cycle. The bank considers neutral to be somewhere between two and a quarter and three and a quarter per cent, so a hike to two and a half would still leave policy fairly gentle.

There is also the worry about expectations. Reuters reports that more than half of firms in the bank's latest survey intend to pass higher input costs on to customers, and consumers' long-term inflation expectations have climbed. Doug Porter, chief economist at BMO Financial Group, said the governor's concern about energy prices has probably gone beyond the comfort zone. Porter added that he was not personally in favour of a hike because of the weaker economy, but the central bank's messaging points that way.

The case for holding

Not everyone is sold. Core inflation, which strips out volatile items like fuel, has eased below the two per cent midpoint of the target range, and Reuters says food and other prices are not yet showing the oil shock trickling through. Meanwhile the job market is wobbling: the last two employment reports were weak, wiping out the year's gains, and unemployment sits at six and a half per cent.

The trade fight with the United States adds another weight. Reuters notes that Washington plans higher tariffs in January on some Canadian goods, including autos, auto parts and steel. Stéfane Marion, chief economist at National Bank of Canada, said at a mortgage industry conference that he does not think the bank should be hiking, and if it does, it cannot be too aggressive, as reported by Canadian Mortgage Professional. TD Securities, for its part, expects a hold now and increases in December and January.

What it means for your money

If the bank does raise rates, banks usually lift their prime rates in step, so anyone with a variable mortgage or a line of credit would see borrowing costs rise almost immediately. Canadian Mortgage Professional adds that housing activity has been sluggish all year, and it is unclear whether a hike would cool things further.

For younger Canadians saving for a first place or carrying student debt, the bigger story may be the signal. A hike would tell borrowers that cheap money is not coming back soon. A hold paired with a hawkish message would say much the same thing, just more quietly. Either way, the quarterly Monetary Policy Report, released alongside the decision, is expected to raise the inflation forecast for the coming year, according to Reuters.

What to watch on Wednesday

The announcement arrives at nine forty-five in the morning Eastern time, and Macklem's press conference afterward may matter as much as the number itself. Watch whether he hints at a second move in December, and whether the bank changes its estimate of the neutral rate. The United States Federal Reserve also decides on Wednesday, and it is widely expected to hold.

For more Canadian money and policy stories, check our Canada coverage and the latest from around the world. Whatever happens, the decision will show how worried Canada's central bankers really are about the price of a tank of fuel turning into the price of everything.