BMO Capital Markets has changed its call on the Bank of Canada. The investment bank now expects the central bank to raise its policy rate by a quarter of a percentage point at next week's decision, even though September inflation came in cooler than expected. The reason: fresh surveys from the Bank of Canada suggest that trade tensions and higher energy prices are starting to push up what businesses and households think inflation will be in the future.
The Bank of Canada published its third-quarter Business Outlook Survey and its Canadian Survey of Consumer Expectations this week. BMO's analysts read those reports as a warning sign. Businesses and consumers appear to be bracing for faster price increases, driven in part by ongoing trade disputes and the cost of energy. That matters because inflation expectations can become self-fulfilling. If people believe prices will keep climbing, workers tend to ask for bigger pay raises, and companies feel more comfortable raising their own prices. That dynamic can keep inflation elevated even after the initial shock fades.
Why a softer CPI reading didn't change the picture
September's inflation data, released earlier this month, showed a slowdown in price growth. That might normally argue for the Bank of Canada to hold rates steady. But BMO argues the surveys carry more weight in the current environment. The bank also noted that the timing of the surveys can blur the signal—responses may have been collected before some of the most recent data came in—but Governor Tiff Macklem's recent hawkish comments have reinforced the case for action.
Macklem has repeatedly stressed the central bank's commitment to bringing inflation back to its 2% target. His tone, combined with the survey evidence, suggests the Bank of Canada is more worried about upside risks to prices than about the recent dip in the headline number. BMO now tilts toward a 25-basis-point hike at the next meeting, a shift from its earlier expectation of a hold.
This is not the first time this year that inflation expectations have driven rate decisions. Canada's inflation ticked up to 3.1% earlier this year on higher gas prices, and the central bank has been navigating a delicate balance between supporting growth and keeping price pressures in check.
What a hike would mean for your borrowing costs
A quarter-point move is small on paper, but it can show up quickly in your finances. Banks typically reprice their prime rate and other floating-rate benchmarks soon after a Bank of Canada decision. That means variable-rate mortgages and home equity lines of credit (HELOCs) would see higher interest payments almost immediately.
Even if you have a fixed-rate mortgage, the impact can be indirect but real. When markets shift from expecting a hold to expecting a hike, short-term funding costs and government bond yields often move first. Lenders use those yields to price new fixed-rate mortgages, so a change in expectations can tighten borrowing costs even before the next inflation report comes out.
For everyday investors, this is a reminder that the Bank of Canada's decisions ripple through more than just the stock market. The TSX slipped recently as cooler inflation trimmed rate-hike odds, showing how sensitive markets are to the central bank's path. A hike next week could reverse some of that sentiment.
What to watch next
The Bank of Canada's next policy announcement is scheduled for next week. Investors will be watching not just the rate decision itself, but also the accompanying statement and Governor Macklem's press conference for clues about what comes after. If the bank does hike, the question will be whether it signals another move in December or signals a pause.
The September CPI report had already raised questions about whether the Bank of Canada would move in December. BMO's new call suggests the bank may not wait that long. The loonie slipped when softer inflation cooled October hike odds, but a hike next week could give the currency a boost.
For investors, the key takeaway is that inflation expectations are now a central focus for the Bank of Canada. Even if actual price growth cools, the central bank may act to prevent expectations from becoming entrenched. That could mean higher borrowing costs for households and businesses, and it could weigh on consumer spending and corporate profits.
As always, the Bank of Canada will balance its inflation mandate against the risk of slowing the economy too much. But for now, BMO's shift suggests the bank is leaning toward action, not patience.
