Markets have priced in a potential Bank of Canada rate hike this week as economists weigh the impact of higher energy prices on inflation.
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Expectations are rising that the Bank of Canada will raise its key policy rate this week after higher energy prices added pressure to the outlook for inflation, with financial market odds for a hike at nearly 78 per cent as of Friday afternoon, according to LSEG Data & Analytics.
The central bank has held its policy rate at 2.25 per cent for seven consecutive meetings. In a client note dated Thursday, RBC economists said they are now expecting a quarter-point increase as the Bank of Canada faces a “pivotal decision amid evolving economic conditions,” while also adding they have a “very low conviction” in a hike.
RBC said there is a significant chance the Bank of Canada instead uses the meeting to set up a rate increase in December or January. RBC assistant chief economist Nathan Janzen also pointed to comments from governor Tiff Macklem as helping shift expectations.
Janzen said Macklem warned during the International Monetary Fund meetings in Bangkok that persistently high global energy prices will raise the inflation outlook in Canada, adding that “That essentially just emphasized that the central bank is increasingly worried about the potential impact of higher oil prices on future, broader inflation pressures, and they feel confident enough the economic backdrop is going to gradually continue to improve.”
The renewed focus on energy prices comes as Statistics Canada reported the annual inflation rate rose to 3.1 per cent in September, with the war in the Middle East cited as a factor pushing up gasoline prices. Earlier this month, Statistics Canada also reported the labour market stalled for a second straight month in September, as the economy lost 68,000 positions.
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