OTTAWA
The Bank of Canada held its policy rate at 2.25 percent Wednesday, but Governor Tiff Macklem's hawkish tone on inflation drove swap markets to price a near-certain quarter-point hike by Dec. 9.
Swaps now show roughly 50 percent odds of a hike at the Oct. 28 meeting, climbing to nearly 100 percent for December—a sharp move from just over 60 percent before the press conference. An additional 25 basis points is priced by March.
Macklem's suggestion that multiple rate hikes remain possible, combined with the central bank's removal of language describing the current rate as "appropriate," signaled a shift in tone. Bond yields rose during the press conference as traders recalibrated duration risk.
The economic backdrop supports the hawkish shift. Second-quarter GDP printed at 3.3 percent annualized, exceeding the BoC's 2.5 percent forecast. Unemployment fell to a two-year low of 6.4 percent in July. Headline inflation rose to 3.0 percent, at the top of the BoC's control range, driven largely by gasoline prices up 25.7 percent year-over-year.
Geopolitical tensions add upside risk to energy prices. Renewed U.S.-Iran hostilities have closed the Strait of Hormuz to commercial shipping, pushing West Texas Intermediate crude above $90 per barrel. That impulse is unlikely to fade near-term, keeping inflation pressures live.
Yet the BoC held Wednesday, citing the Aug. 21 collapse of U.S.-Canada trade talks as introducing significant economic uncertainty. Macklem acknowledged the tension between strong domestic data and external risks in his remarks.
Nick Rees, head of macro research at Monex Canada, said the risk balance skews hawkish at the margin, supporting Canadian dollar strength post-event. But he cautioned that the onus remains on data to justify tightening.
Economist forecasts diverge sharply. Stephen Brown at Capital Economics said the BoC delivered a more hawkish message and expects his firm to pull forward its first-hike forecast to the second quarter of 2027 from later dates, citing persistent oil prices. Desjardins expects rates to remain on hold through year-end, with a 50 basis point hike to 2.75 percent in the first half of 2027.
The divergence reflects ongoing recalibration of duration risk as central bank rhetoric collides with geopolitical shocks.
