Global investment bank UBS has changed its outlook for Canadian interest rates, now expecting the Bank of Canada to raise its policy rate twice in the coming months. In a research note, UBS Global Research said it anticipates 25-basis-point hikes in October and again in January 2027, a shift from its earlier view that the central bank would hold rates steady this year.
The change isn't because the Canadian economy suddenly looks much stronger or weaker, according to the analysts. Instead, they argue the central bank's risk balance has tilted. UBS believes the Bank of Canada is now placing more weight on inflation risks tied to the Middle East—such as higher energy costs spilling into broader prices—and less weight on downside risks from trade.
Why the Bank of Canada might be leaning toward hikes
Central banks typically set interest rates based on their outlook for inflation and economic growth. When inflation runs above target, they often raise rates to cool spending and borrowing. The Bank of Canada's target is 2% inflation, and recent comments from Governor Tiff Macklem have suggested policymakers may be less willing to "look through" above-target inflation while businesses continue operating normally.
That's a notable shift in tone. In the past, central banks sometimes tolerate temporary price spikes if they expect them to fade on their own. But if the Bank of Canada is now more concerned about persistent inflation—especially from energy costs—it may act sooner rather than later.
The next policy meeting is scheduled for October 28, and markets will be watching closely. Even before that date, investors often adjust their expectations based on the rate path they anticipate, which can move borrowing costs in the real economy.
What this means for your borrowing costs
For everyday Canadians, the most immediate impact may not be the official rate decision itself, but the market reaction ahead of it. If investors start pricing in UBS's two-hike path, banks' funding costs often drift upward. Lenders can pass those higher costs through quickly to products tied to their prime rate, such as variable-rate mortgages and home-equity lines of credit. That means interest bills could climb even before the Bank of Canada officially moves.
Fixed-rate mortgage quotes can also shift, because they're closely linked to government bond yields, which move on expectations. So anyone shopping for a new loan or heading toward a renewal could see less generous rates, even if the central bank hasn't changed its policy rate yet.
This is a reminder that central bank policy doesn't just affect the headline rate—it ripples through the entire lending market. For investors, it also means bond yields and bank stocks could react to any hints about the rate path.
Broader context and what to watch
The Bank of Canada's potential moves come amid a global environment where other central banks are also grappling with inflation and geopolitical risks. For instance, the Bank of Japan has signaled faster rate hikes, and the U.S. Federal Reserve has shown patience on rate changes, as seen in recent Treasury yield movements. These global trends can influence Canadian markets and the loonie.
Investors will likely focus on the October 28 meeting for any signals about the rate path. UBS's call is just one forecast, but it highlights the uncertainty facing policymakers. If energy prices remain elevated, inflation could stay sticky, forcing the Bank of Canada to act more aggressively. On the other hand, if trade tensions or economic weakness emerge, the central bank might hold off.
For now, the key takeaway is that borrowing costs may be heading higher, and it's wise to plan accordingly. Whether you're a borrower or an investor, keeping an eye on the Bank of Canada's next moves is essential.
